Landlords warned about tax affairs

In the current economic climate, MPs are urging the goverment to get tougher on all forms of tax evasion which includes income from buy-to-let.

Esimates cite a 'hidden economy' worth more than £2 billion a year. A recent report says that the Inland Revenue has not fully assessed the risks to tax from different sectors and that it must implement more joined up investigative measures to uncover tax evasion from a number of sources.

The report highlights recent successful measures to claim due tax. HMRC’s £6 million clampdown on offshore tax evasion has already achieved 45,000 people paying more than £400 million in additional tax.

Landlords are now being warned that the HMRC is already after buy to let tax-dodgers who under declare rental income or avoid it altogether. According UHY Hacker Young accountancy group, in the past four months HMRC has launched 7,371 informal investigations into buy-to-let landlords.

With the tenancy deposit scheme register, the HMRC will now find it easierto track down landlords with a 'ready-made list' to cross reference. Since April 6 2007 all landlords who take deposits from their tenants have been obliged to join a statutory tenancy deposit scheme. In fact many accountants believe that the real motivation for this scheme was to help the revenue identify landlords.

‘HMRC has legal powers entitling it to detailed information from the schemes which could be used to target landlords, although it is not yet known whether they have exercised these powers,’ says Maugham.

‘While there is no legal requirement to comply with these interventions, taxpayers who are contacted should take it seriously,’ warns Roy Maugham, tax partner at UHY Hacker Young. ‘Those who think they may owe tax on their rental income should make an early disclosure as part of a negotiated settlement in order to minimise the cost of penalties they incur.’

'As part of the programme, HMRC also has the right to contact taxpayers by telephone or in person to discuss aspects of their tax affairs identified as being at high risk of error as part of its compliance campaign. These kinds of interventions allow HMRC to avoid opening a formal tax enquiry, which can be far more restrictive in terms of the areas it can probe,’ says Maugham.

‘HMRC has legal powers entitling it to detailed information from the schemes which could be used to target landlords, although it is not yet known whether they have exercised these powers,’ says Maugham.

Landlords who decide to sell now must realise that the HMRC will also be looking at the Land Registry to see if a property has been sold and the capital gains profits declared.This is thought to be a larger area of interest to HMRC as this will create more income than tax on rental income, where most of the income can be offset against mortgage interest payments.

‘Unpaid CGT on sales of buy-to-let investments could be huge, so landlords need to make sure they have taken it into full account,’ advises Maugham. ‘Landlords need to get their house in order and be very careful about checking the accuracy of their tax payments or they may be heavily penalised.’

HMRC has been gathering lists of landlords from letting agencies. Letters sent ask taxpayers and their tax advisers for details on their property investment activity for the past six years and request a detailed breakdown of costs, such as repairs and professional fees.

According to Maugham, the HMRC targeting the buy-to-let sector is successful ina large part to ignorance amongst landlords about how buy-to-let income is taxed meaning that mistakes are common.

‘Landlords need to be aware that repairs and improvements to buy-to-let properties are taxed differently. If expenditure permanently enhances the value of a property, such as an extension, it cannot be offset against rental income. But repairs are a tax-deductible cost,’ says Maugham.

‘Also, buy-to-let landlords can only offset the interest component of their mortgage against rental income. Investors often mistakenly assume that their monthly installments can be offset against tax, but that will normally include capital repayments which are not allowed,’ he says.

Stephen Ludlow comments:"All landlords should seek advice from an accountant who is expert in buy-to-let tax allowances. Landlords forget about important allowances such as energy saving measures worth £1500, and the administration cost of running their own lettings."