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Taxman warns landlords on Capital Gains Tax

Buy-to-let landlords are being told to get their tax in order after HM Revenue & Customs (HMRC) said it was concerned that underpaying, even if unwitting, was a problem among amateur property investors.

As many as 80,000 people may face investigation over their tax although customs spokesman Patrick O'Brien allayed concerns by saying: "The idea that we're dragging in hordes of buy-to-let investors to face some medieval inquisition is just so wide of the mark."

Evidence of this concerned, but conciliatory, attitude from the taxman came with its, now expired, offer of an amnesty for offshore investors who realised their mistakes over tax and reported it - a get-out clause granting the penitent a 90 per cent cut in fines.

However, since the June 22nd deadline passed HMRC have been actively targeting those investors who have not correctly declared their profit made through their dealings in the buy-to-let property market.

Worried investors should seek financial advice, according to Lee Grandin, managing director of Landlord Mortgages, who said: "The cost of several hours of an expert's time is considerably less than the tax bill you could receive if you choose not to do so."

But he added that the vast majority of buy-to-let landlords have nothing to worry about, despite the warnings from HMRC.
 
"There is little need for the professional landlord to be concerned with this news. The main target for the Revenue will be those who are selling properties and not declaring the sale for capital gains tax."

Capital gains tax concerns profit made by an individual when they sell a property and is payable at 40 per cent on any earnings above the threshold which stands at £9,200 this tax year.

However, it is only really short-term investors who will be hit hard by the capital gains tax clampdown. If investors have been less willing to cash in their property despite the widespread growth in house prices, they may benefit as the percentage payable on capital gains drops by five per cent a year from the third year after making the purchase.

This means that early converts to buy-to-let investment may have less to fear from any investigation from the taxman as, apart from likely having been in the game long enough to work out the tax issues, they may have held onto a property for a good number of years and so get a reduced capital gains tax bill.

But it is so-called 'ghost' amateur landlords that have the most to be worried about if their affairs are not in order.

Banks, tenants and letting agents are to be consulted by HMRC in order to gather the information needed to track down property owners that have failed to declare their investments or incorrectly claimed deductions for mortgage payments through the buy-to-let offset scheme.

Commenting on the situation, Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: "Buy-to-let investors are generally not tax evaders. Many think the mortgage interest is at such a level it covers the rental income and they don't have any additional tax to pay. But the tax situation is so complex that they may well have to pay tax."

06 Jul 2007