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A warning about potential tax issues facing property owners and landlords, and advice on how to deal with them - from Tax Insider Lite

Introduction

In the March 2009 Budget speech, Mr Darling said with regard to tax, “I am determined to continue our successful drive to prevent avoidance and evasion.”

From one angle of the 2009 Budget, Mr Darling increased the interest in property purchase at the lower end of the market. He said, “I will double the stamp duty limit for first-time buyers from midnight tonight, from £125,000 to £250,000 for this year and next.”

This action is pitched against the fact that HMRC are trying to increase the HMRC “tax take” on amateur property speculators. 

How Is HM Revenue & Customs Targeting Landlords?

Sophisticated software means HMRC can “interrogate” the Land Registry database more efficiently than, say, five or ten years ago, and their access to websites, etc., is much greater than before. With the increased penalty system for HMRC enquiries from 1 April 2008 and 2009, there is the potential for taxpayers who are at fault to be caught, not just with uncollected tax but also penalties thereon of up to 100%. [ Could be worse - the penalty can now be up to 200% if, say, the property's in an "opaque tax jurisdiction" - Ed. ] There will be interest payments on unpaid tax as well.

What Should I Do If I Think I May Have Undisclosed Property Income or Gains?

If any taxpayers have concerns on undisclosed property or gains then they should disclose now rather than HMRC discover at a later stage.  Professional advice should be sought. HMRC’s compliance handbook provides examples of “deliberate but not concealed” inaccuracies. 

The new penalty system is “behaviour based” so disclosure of undisclosed income and sales from property at an early stage is important. It could be that expenses, (e.g., mortgage interest),  exceed the income and by the time the correct calculation is made there will be very little, if any, extra tax and penalties to collect. Some property transactions can be deemed to be taxed as “trading”, as opposed to “capital”, i.e., subject to Income Tax.

Property Developers - Treatment as Income

Further to the consideration of property transactions becoming caught as trading income and not being caught as capital gains, property developers (including amateur property owners) are usually caught under the terms of legislation (ITA 2007 s 756) which encompasses cases where: ‘land is developed with the sole or main object of realising a gain from disposing of the land when developed’. The aim of this section of the Taxes Act is for HMRC to prevent property-dealing profits being treated as capital. This could result in Income Tax being collected at 40% or 50%, as opposed to the (current!) Capital Gains Tax rate of 18%.

The scope of ITA 2007 s 756 is broad and catches transactions which have little or no element of artificiality; therefore the avoidance can be accidental or unwitting by the property- or land-owner. There could be everyday property owners who will be caught by these provisions.  Another area of HMRC attack is undeclared rental income from second homes or a buy-to-let portfolio. As mentioned above, often the mortgage interest, etc., can exceed income but the existence of the income still has to be declared.

Practical Tip

The conclusion is for property owners to take professional tax advice on all property transactions and the tax impact thereon. Actions taken with innocent lack of knowledge could result in extra tax BUT there is great scope to claim other expenses and reliefs – "seek professional advice" has to be the answer for all property owners who are earning extra income from property but possibly not making a full disclosure to HMRC.

Originally Published as "How to Prevent Unwanted Attention from the Taxman (article from TaxationWeb's 'Tax Insider Lite').

About The Author

Tax Insider publishes monthly newsletters and reports for everyone with an interest in responsible tax saving, including professional advisers, business owners, entrepreneurs, property investors and other UK taxpayers.

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