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HMRC To Target UK Buy-To-Let Investors

by Robert Lee,, London

30 May 2007

The UK tax authorities are set to crack down on tens of thousands of UK investors owning buy-to-let properties and who have not paid the correct amount of tax, it has been reported.

According to a report in the Times newspaper, HM Revenue & Customs has identified 80,000 landlords who may have claimed too much tax relief, failed to declare the full amount of rent received from a property, or not declared a capital gain on the sale of a property.

The paper also reported that HMRC will target so-called 'ghost landlords,' property owners who have not declared themselves to the tax man, in its new campaign to extract ore tax out of UK taxpayers and investors. It will supposedly use information from banks, tenants and letting adverts to find those evading their tax responsibilities.

Landlords must pay income tax at rates up to 40% on their rental income. However, it is thought that HMRC is also targeting the many property owners who may have incorrectly claimed deductions for mortgage repayments. While current law allows property owners to deduct the entire monthly mortgage repayment on an interest-only mortgage, the rules stipulate that they cannot deduct payments that go towards reducing the capital borrowed and it is thought that many property owners may have unwittingly deducted such payments unaware that their mortgage has an element of capital repayment.

A spokeswoman for HMRC told the Times that: “We met representatives of the accountancy profession this week for their views on how we can best inform landlords of the obligation to report their property income to us.”

However, HMRC has dismissed reports that it is preparing a crackdown on buy-to-let investors as "scaremongering of the worst order," according to the Scotsman newspaper. "Claming back tax is part of our function. We would not be doing our function if we were not," an HMRC spokeswoman was quoted as saying.

Nonetheless, tax experts are urging property owners who may not have declared their full income or capital gains to consider taking advantage of HMRC's offshore disclosure facility. Announced in April 2007, the offshore tax amnesty allows investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns. But for a limited period, the amnesty will allow taxpayers to come forward and make a full disclosure of all undeclared liabilities, not just those connected with an offshore account.

Second home ownership in the UK has exploded in recent years with investors no longer able to rely on pensions to provide an adequate income during retirement. Research by the market analyst Mintel, released last month, said there are currently around two million people in the UK who own a second home. Around half of these let out their additional properties, the research found.

An acute shortage of new homes, combined with a strong demand in the buy-to let market has driven house prices up rapidly across the UK in recent years, with the average house worth just shy of GBP180,000 in 2006.

According to figures from Landlord Mortgages, a specialist buy-to-let broker, landlords in Britain face a capital gains tax bill of more than GBP4.1 billion, with landlords facing an average bill of GBP48,600 based on 2006 housing prices.

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