Reports in various papers reached a fever pitch with warnings that landlords could face tax bills of “thousands of pounds”, and HMRC recently issued (almost identical) statements on 31 May and 4 June denying they were having such a “crackdown”.
As an ex-inspector of taxes who is fluent in ‘Revenuespeak’, I thought it would be helpful if I translated the latest HMRC statement into normal English for our readers:
HMRC :“By way of background, HMRC is not planning a tax crackdown in the way implied in the media reports”
English translation: We didn’t like the way we were portrayed in the press.
HMRC: “HMRC is planning to take a concerted approach to helping landlords of all descriptions (not just in the buy to let market) to understand and comply with their tax obligations in what they recognise to be a complex area”.
English translation: We are having a crackdown on landlords.
HMRC: “In taking this approach the explicit presumption will be that the majority of landlords want to make a correct return but that many may need some help to understand exactly how to do so”.
English translation: We think a lot of landlords are claiming expenses or reliefs they are not entitled to.
HMRC: “The approach, which was outlined to agent representatives in a recent workshop, will focus on giving landlords improved access to guidance and support so that they can understand how to calculate their own tax liabilities and, where there is tax to pay, using the lightest possible touch to ensure that the correct amount is paid”.
English translation: One of accountants at the workshop must have leaked the news to the press! We are going to revamp the inadequate guidance on our website and perhaps put a few ads in the media warning you landlords that we are coming after you – and if we find you have underpaid tax we will explain in a sympathetic way how we calculate the tax, interest, and penalties we will be charging you.
So, what will HMRC be looking for?
That is, landlords who are not declaring their rental income. HMRC have access to a lot of information to help them identify such lamdlords – for example, the Stamp Office has details of all property transactions and HMRC have the power under section 19 of the 1970 Taxes Management Act to issue returns to any tenant demanding to know how much rent they pay and to whom. They can also issue such returns to letting agents. When I was an inspector, we had a “blitz” of these returns on a certain area of London and collected a lot of extra tax.
Deduction of Mortgage Repayments
Although many Buy to Let mortgages are “interest only”, if your mortgage payments do include any element of repayment of the capital borrowed, that part of the mortgage payment cannot be deducted from the rent. Apparently, HMRC think that many landlords are making mistakes with this.
Repairs v Improvements
This is an old chestnut – you can deduct repairs from the rental income but not the cost of “improvements” to the property. In some cases the distinction is clear but there are always grey areas, and in my experience some inspectors seem to regard almost any work on a property as an
Cost of Furniture and Fittings
The initial cost of these is not deductible. You can claim the cost of replacements or you can claim a “wear and tear” allowance of 10% of the rent receiveable – for each property, you must decide which method to use and you cannot then change it in a later year. The calculation of the “wear and tear” allowance is not always straightforward, as cetain expenses have to be deducted from the rent before calculating the 10%.
Interest and Equity Release
A common strategy among Buy to Let landlords is to release equity from their properties by remortgaging them. The interest payable on the remortgage is only allowable as a deduction from the rent in two circumstances:
§ Where the total amount of the mortgage is no more than the market value of the property on the day it was first let, or
§ Where the money raised by the remortgage is used for the letting business – either to buy another property or to pay for repairs
What Should I Do?
The above are only a few examples of common mistakes made by landlords in their tax returns – or of areas where HMRC are fond of challenging the deductions claimed.
Unless you are absolutely sure you have got it right, seek professional advice on what is and is not allowable as an expense.
If you are a “ghost” landlord, then it is in your own best interests to come forward and declare your rental income to HMRC before they come knocking on your door – if you do so, the amount of penalty you may be charged on the unpaid tax will be significantly less than if you wait for HMRC to find you out.