HM REVENUE & CUSTOMS INVESTIGATION INTO BUY-TO-LET RESULTS IN SURGE IN CAPITAL GAINS TAX RECEIPTS

An article by Kyle Caldwell in The Telegraph on 3 August 2014 (HMRC Turns Up Heat on Landlords*) reported that Her Majesty's Revenue & Customs (HMRC) was planning on sending 40,000 letters to landlords suspected of not having paid enough tax.

A follow-up article (Kyle Caldwell, The Telegraph, 10 January 2015), entitled HMRC Investigations into Buy-to-Let Spark Surge in Tax Receipts**, now reports on the results of HMRC's enquiries, carried out where evidence of underpayment of tax was believed to have taken place, viz....

Failures by owners of buy-to-let property to declare gains and pay the appropriate tax are believed to be behind the trend [surge in Capital Gains Tax receipts]. Figures obtained by a firm of accountants show HM Revenue & Customs’ tax inspectors obtained £136m as a result of probes into underpayments of capital gains tax for the year 2013-14. This marks a 24pc increase from the previous year, when £110 million was collected.

The sharp upsurge has been pinned on the taxman putting increased resource into stepping up its scrutiny of private landlords.

Soaring property prices has helped fuel bigger profits for buy-to-let investors in recent years and the revenue suspects tens of thousands are unaware of the tax due, or are bending the rules and understating their capital gains, according to Mark Giddens, a tax partner at UHY Hacker Young, the accountancy group which obtained the data.

“The change in the mood music at HMRC means that property investors are now firmly in the crosshairs for tax investigations,” Mr Giddens said.

“There are a significantly greater number of buy to let landlords and private property investors in the UK than was the case 10 years ago, and they make tempting targets.”

Fewer than 500,000 taxpayers are registered with HMRC as owning second properties. The taxman estimates that the true number of landlords is much higher, at around 1.5 million, and wants to close the gap.

HMRC has been very public about its clampdown on landlords. It has run a number of campaigns warning those who fail to pay sufficient tax on either rental income or capital gains.

Last August the taxman sent 40,000 letters to landlords it suspected were bending tax rules.

The letters warned landlords to put their affairs in order or else run the risk of a large fine or a criminal investigation.

In general the capital gains tax take is growing strongly, driven both by rising shares and property prices. According to the latest figures from the Office for Budget Responsibility the CGT take for 2012-13 was £3.9bn. It is estimated to rise to £6.7bn in 2015-16 and reach £9bn by 2018-19.

Rising property prices are not the only driver of the trend: changes introduced by the Government relating to second properties will also increase the CGT take over time. The main change so far relates to second properties the owner formerly lived in.

Owners’ main homes are free of capital gains tax as long as they remain their main home – but under another concession, a property that was once a main home is also free of capital gains tax for the last three years of ownership.

To take advantage of the loophole some homeowners “flipped” the classification of their main and second residences so they could limit eventual tax. David Lawrenson of Lettingsfocus.com, a website for landlords, said: “Under previous gtax regimes landlords had taper relief and other reliefs which took account of inflation. There are no reliefs available now that take inflation into account.

A spokesman for HMRC said: “Our enquiries are extremely effective as these figures show.”

*http://www.telegraph.co.uk/finance/personalfinance/10999633/HMRC-turns-up-heat-on-landlords.html

**http://www.telegraph.co.uk/finance/personalfinance/tax/11335872/HMRC-investigations-into-buy-to-let-spark-surge-in-tax-receipts.html

See also Landlords Complain: We're Hounded by Councils, Richard Dyson, The Telegraph, 1 March 2014

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/10668774/Landlords-complain-Were-hounded-by-councils.html