Buy-to-let landlords facing tax crackdown

22 February 2008

The taxman is believed to be planning a major crackdown on buy-to-let landlords who have failed to declare their rental income.

PKF Accountants & Business Advisers says HM Revenue and Customs has already sent warning letters to hundreds of buy-to-let landlords about taxes on their undeclared rents. As well as receiving backdated tax bills, offending landlords could also face fines for unpaid taxes dating back six years.

John Cassidy, tax investigations partner at PKF, said: “Over the last few years, HMRC has geared itself towards tackling tax evasion and avoidance and it intends to use the information it has to seek out evaders in a systematic fashion across the board. Those who did not receive a letter this week and believe they may have escaped the Revenue’s grasp should note that this is only a pilot exercise for ongoing interventions that will start later this year.“

Nationwide Building Society said many landlords could be at risk of backdated tax bills and fines because of ignorance over their tax obligations.

Andy McQueen, managing director of Nationwide’s buy-to-let lending division, said: "Essentially HMRC can use stealth tactics to find information on landlords who may not have declared rental incomes, including targeting lettings agents and reviewing stamp duty records.”

Data from mortgage lenders, compiled by trade body the Council of Mortgage Lenders, shows buy-to-let mortgages have now hit the one million mark, with 1,038,000 loans outstanding at the end of 2007. In the second half of 2007, banks and building societies lent a total of £24.1 billion in buy-to-let loans, up from £21.2 billion in the first half of the year and £20.8 billion in the second half of 2006.

Buy-to-let landlords

If you are a buy-to-let landlord currently renting out a property then you will have to pay income tax on the rent regardless of whether you are making an overall profit or not.

Cassidy says many but-to-let landlords are confused about what they can deduct against their rental income. For example, many think mortgage payments can be deducted whereas in fact only the interest on loans is deductible.

According to HM Revenue & Customers, anything from letting agent’s fees to building and contents insurance to council tax can be deducted from your rental income. However, Cassidy warns that this is a grey area and landlords should get advice if they are worried about deducting too much or not enough.

He added: “Maintenance and repairs are deductible but improvements aren’t. This is because improvement is considered an investment, as it is likely to add value to the property. ”

Potential deductable expenses
Letting agent's fees
Some legal fees
Accountant's fees
Buildings and contents insurance
Mortgage interest
Property maintenance and repairs
Utility bills
Rent and service charges
Council tax
Other services (eg gardening)
Direct costs of letting the property (eg advertising

Even if you are making a loss on a buy-to-let property you must still declare your earnings from rent for income tax purposes.

However, losses one year can actually benefit landlords the next. Lee Grandin, managing director of buy-to-let specialist Landlord Mortgages, said: “Landlords can carry forward any losses each year and deduct these against their rental income.”

When you come to sell your home then remember that you may have to pay capital gains tax. From 6 April 2008, new CGT rules will come into force meaning anyone selling a property that isn’t their primary residence will be taxed 18%.

Second homes

More and more people are buying second homes for weekend or holiday retreats. Although everyone’s primary residence is exempt from CGT, second homes will attract this tax when they are sold regardless of whether they have been rented out or lived in by the owner.

If you buy a second home then you have a window of two years to decide which property you want to elect to be your primary residence and which one you want to pay CGT on. This can be changed later on as long as you are prepared to transfer your electoral and postal details.

The period of time that a property is elected as your main residence is exempt from CGT, as are the last 36 months of ownership. And if you have previously rented out your main residence then you can claim up to £40,000 (or £80,000 if you own the property with another person) of letting relief.

Property developers

Cassidy says that many developers are so focused on trying to jump on the bandwagon and make a profit on property that they don’t remember to consider the tax implications.

Property development (buying a property to do it up and sell) is considered by HM Revenue & Customs as a trade and is therefore liable for CGT rather than income tax.

In addition, VAT may also apply. Cassidy recommends that developers keep every receipt for the cost of renovations in order to reduce the VAT bill.

Overseas properties

If you buy a property abroad then you are still liable to pay income tax and CGT on it in the UK. And you may also have to pay equivalent taxes in the country you have bought in, so it’s well worth doing some research before stumping up for the home in the sun.

Cassidy said: “Some European countries, such as France, also charge home owners wealth taxes. Many people don’t realise the extent of tax issues when buying abroad but these should all be considered before buying.”

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