Taxman in Buy To Let Probe
Buy to Let landlords remain confident about the future despite the current fall-out from the credit crunch, according to research carried out by the National Association of Landlords (NLA). The NLA found that 23% of landlords intend to expand their portfolio over the next five years. A further 60% intend to maintain their current portfolios over the same period. Fewer than 18% said they would reduce their holdings and only 2.4% said they would abandon the private rented sector completely. It is encouraging to see that confidence remains strong. However, it is important that investors should be aware of the legal requirements involved in buy to let.
Landlords need to be aware that they require a licence from the Local Authority if they want to rent out homes for multiple occupation such as student flats. The Housing Act also places obligations on landlords to ensure their properties are safe, secure and free from hazards.
New landlords will also need to familiarise themselves with the fairly new tenancy deposit scheme, which is designed to protect a tenant’s money from unscrupulous landlords. When a tenant pays a deposit, the landlord has 14 days to hand it over to a government approved private company.
Landlords also need to be aware that HM Revenue and Customs (HMRC) has launched hundreds of investigations into the tax affairs of taxpayers they believe have under-declared or failed to declare taxable income from their buy to let activities.
2000 investors are expected to be targeted in a drive to identify taxpayers who have failed to declare investment income. It is thought that the first wave of enquiry letters includes many sent to taxpayers who have already sold their buy to let properties and therefore probably thought it unlikely that their under-declarations would be discovered.
Where the evasion of tax is wilful (i.e. fraudulent), HMRC can collect tax for up to 20 years after it is due, plus interest. They can also levy penalties of up to 100 per cent of the unpaid tax. For a number of years now, HMRC has also had a useful monitoring tool, to identify potential unpaid Capital Gains Tax, via the Stamp Duty Land Tax form which has to be submitted, upon completion of the majority of property transactions.
The HMRC probe is in addition to their usual enquiries in this area, which focus on excessive expense claims and, in particular, on whether taxpayers have wrongly claimed their mortgage payments in full, as opposed to just the interest, as a tax deduction. Only the interest element of a mortgage is allowable as a deduction for Income Tax purposes, not the capital element.
Tax Inspectors are now taking a much more uncompromising attitude, possibly due to the influence of the “Customs” side of HMRC, following the merger of the Customs and Excise and the Inland Revenue. Customs Officers have traditionally dealt with people whose activities are criminal and their Inspectors, as a matter of course, adopted a very robust attitude to dealing with taxpayers since they were given the job of supervising the collection of VAT.
Proof of the increasing difficulty in negotiating with HMRC can be seen in the rapidly increasing number of taxpayers who appeal against the decisions of HMRC Officers to the VAT and Duties Tribunal and Special Commissioners of Tax. The number of such appeals rose from 2,014 in 2002 to 3,146 in 2006.
The 2008 Budget contains provisions which give HMRC Officers significant new powers to obtain information concerning the financial affairs of taxpayers, including the right to require third parties to provide information and making the failure to provide that information, in certain circumstances, a criminal offence
If you are engaged in a dispute with HMRC, you should ensure that you have the benefit of professional advice and do not compromise your position if you have to go to a Tribunal.
The information contained in this newsletter was prepared in May 2008 and is intended for general guidance only. It provides information in a concise form and is not a substitute for obtaining legal advice.
Landlords need to be aware that they require a licence from the Local Authority if they want to rent out homes for multiple occupation such as student flats. The Housing Act also places obligations on landlords to ensure their properties are safe, secure and free from hazards.
New landlords will also need to familiarise themselves with the fairly new tenancy deposit scheme, which is designed to protect a tenant’s money from unscrupulous landlords. When a tenant pays a deposit, the landlord has 14 days to hand it over to a government approved private company.
Landlords also need to be aware that HM Revenue and Customs (HMRC) has launched hundreds of investigations into the tax affairs of taxpayers they believe have under-declared or failed to declare taxable income from their buy to let activities.
2000 investors are expected to be targeted in a drive to identify taxpayers who have failed to declare investment income. It is thought that the first wave of enquiry letters includes many sent to taxpayers who have already sold their buy to let properties and therefore probably thought it unlikely that their under-declarations would be discovered.
Where the evasion of tax is wilful (i.e. fraudulent), HMRC can collect tax for up to 20 years after it is due, plus interest. They can also levy penalties of up to 100 per cent of the unpaid tax. For a number of years now, HMRC has also had a useful monitoring tool, to identify potential unpaid Capital Gains Tax, via the Stamp Duty Land Tax form which has to be submitted, upon completion of the majority of property transactions.
The HMRC probe is in addition to their usual enquiries in this area, which focus on excessive expense claims and, in particular, on whether taxpayers have wrongly claimed their mortgage payments in full, as opposed to just the interest, as a tax deduction. Only the interest element of a mortgage is allowable as a deduction for Income Tax purposes, not the capital element.
Tax Inspectors are now taking a much more uncompromising attitude, possibly due to the influence of the “Customs” side of HMRC, following the merger of the Customs and Excise and the Inland Revenue. Customs Officers have traditionally dealt with people whose activities are criminal and their Inspectors, as a matter of course, adopted a very robust attitude to dealing with taxpayers since they were given the job of supervising the collection of VAT.
Proof of the increasing difficulty in negotiating with HMRC can be seen in the rapidly increasing number of taxpayers who appeal against the decisions of HMRC Officers to the VAT and Duties Tribunal and Special Commissioners of Tax. The number of such appeals rose from 2,014 in 2002 to 3,146 in 2006.
The 2008 Budget contains provisions which give HMRC Officers significant new powers to obtain information concerning the financial affairs of taxpayers, including the right to require third parties to provide information and making the failure to provide that information, in certain circumstances, a criminal offence
If you are engaged in a dispute with HMRC, you should ensure that you have the benefit of professional advice and do not compromise your position if you have to go to a Tribunal.
The information contained in this newsletter was prepared in May 2008 and is intended for general guidance only. It provides information in a concise form and is not a substitute for obtaining legal advice.
