Taxing times
The taxman targets buy-to-let

The taxman has launched a sophisticated crackdown on hundreds of thousands of amateur landlords who are profiting from Britain’s buy-to-let boom.

Tax inspectors are using a new computer system to trawl lettings ads and undercover officials are even patrolling the streets. A new whistle blowing line has received tens of thousands of tip-offs about landlords.

The buy-to-let market continues to grow, with 350,000 people taking out mortgages worth a total of £38 billion last year, and the taxman is determined to get his slice of profits from soaring property prices and rents. It is estimated that 700,000 landlords could be paying the wrong amount of tax.

The government is under pressure to pull in as much tax as possible and property investors are a potentially lucrative source of income.

However, accountants are concerned that landlords who have quite innocently failed to pay the correct tax could be subject to prosecutions and fines. The discovery could even trigger a full-blown tax inquiry into every area of your personal finances which can be expensive, intrusive and stressful.

News of the crackdown and the tactics being used emerged on the Revenue’s website recently. Over 120,000 people have phoned the whistle blowing line and there have been a high number of tip-offs about landlords.

Many informers are thought to be disgruntled former husbands, wives or business partners out for revenge.

Revenue investigators have also been poring over local and national newspapers and websites looking for ads, which they compare with landlords’ tax records to catch offenders.

Inspectors, who act more like private detectives than civil servants, are being sent out on to the streets in search of homeowners who rent out properties but fail to declare these earnings.

There is widespread confusion about how both income and capital-gains tax (CGT) applies to buy-to-lets, as shown by the latest crackdown. Many people do not realise that tax on property needs to be declared.

Even if you have been declaring and paying tax, it is easy to make mistakes. There are different rules, depending on whether the Revenue regards a property as a buy-to-let or holiday home, and the CGT regulations can be notoriously complicated.

If you are caught, pleading ignorance is no defence and the end result can be costly. The first danger signal will be a warning letter from the Revenue followed by a payment order for tax due plus interest. There may be penalties on top that can be up to 100 per cent of the amount owed.

Landlords who haven’t been paying the correct tax are being urged to own up now before they are caught.

They will still have to pay tax and interest but penalties can be reduced to nothing if they cooperate with the investigation.

The crackdown is thought to have been prompted by recent sharp gains in property prices, which have created an army of buy-to-let millionaires with hefty capital gains.

The average investor has a portfolio of flats and houses worth £1.5m, according to research by Paragon, a mortgage company, while the average portfolio’s value has risen by about £150,000 over the past year alone.

Strong tenant demand means rents have also been rising at nearly their fastest for five years, according to the Royal Institution of Chartered Surveyors. The typical, buy-to-let investor manages to achieve about £10,000 a year in income before expenses, according to Paragon.

The tax rules
- Rent is subject to income tax, but expenses can be deducted.

- If you rent out a room in your home the taxman will allow you to earn up to £4,250 of rental income a year tax-free, but you must still declare it.

- There is a capital-gains tax liability when you sell but buy-to-lets benefit from non-business assets taper relief, which can reduce your bill.

- If your property is classed as a furnished holiday let you qualify for the more generous business-asset taper relief.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Your home may be repossessed if you do not keep up repayments on your mortgage.

Article date: 03.07