Tax crackdown on
landlords
Revenue & Customs
are investigating
buy-to-let investors
who have been less
than frank as the
tax burden on
homeowners rises
It has been a long
time coming, but HM
Revenue & Custom's
crackdown on
buy-to-let investors
has begun in
earnest. The Revenue
has been gathering
lists of landlords
from lettings
agencies, according
to Wilkins Kennedy,
the accountancy
firm, and has
“launched a
concerted compliance
campaign” against
buy-to-let
investors. It is
sending letters to
hundreds of
individuals who it
believes own
buy-to-let
properties and have
failed to declare
their investments on
self-assessment tax
returns.
“Individuals who
receive these
letters need to take
them seriously,”
says Peter Goodman,
a senior tax partner
at Wilkins Kennedy.
“If they do owe tax,
they should consider
early disclosure as
part of a negotiated
settlement. This may
reduce the penalties
they incur.” The
Revenue's new
campaign has
highlighted the
increasing tax
burden on
homeowners. Research
from the
Organisation for
Economic
Co-operation and
Development (OECD)
shows that property
taxes as a
percentage of GDP
are higher in the UK
than in any other
developed country.
They are also high
as a percentage of
the total tax take:
in 2004 property
taxes made up 12 per
cent of total UK
taxes, compared with
a euro-zone average
of 5.3 per cent.
The rise and rise of
UK property taxes in
recent years has in
large measure been
due to “fiscal
drag”: it is not so
much that tax rates
have been raised,
but that thresholds
have been allowed to
lag behind the rate
of house price
inflation. For
example, had the
inheritance tax
threshold kept pace
with house price
increases since
1995, it would now
be £460,000 rather
than £300,000. Below
we show how
different taxes are
putting the squeeze
on homeowners:
INCOME TAX
Landlords are required to pay income tax on their
profits at their marginal rate of tax. As with any
other business, you can make deductions from your
profits. Allowable deductions include mortgage
interest payments, repairs to the property,
insurance, letting agency fees and 10per cent of
your total rental income to cover depreciation.
Those investors targeted by the taxman will have to
produce a detailed breakdown of costs such as
repairs and professional fees.
CAPITAL GAINS TAX
Goodman believes that “the unpaid capital gains tax
on buy-to-let investments could be huge”. Until
April 6 this year, when the CGT system will be
reformed, investors have been required to pay tax at
40 per cent on any gains over and above the annual
allowance, which is £9,200 in the 2007-08 tax year
and £9,600 in the 2008-09 tax year. Landlords who
have held their investments for several years can,
until April 6, benefit from taper relief, which
reduces the amount of CGT payable by 5per cent after
three years, up to a maximum of 40 per cent.
Taper relief was introduced in 1998 to replace
indexation relief, but that still applies to
properties purchased before then. It allows anyone
selling an asset to uplift the base cost of that
asset for CGT purposes, increasing its value by the
rate of inflation.
After April 6 a new CGT regime will be introduced.
Under the new system, the CGT rate falls to 18 per
cent but taper relief will be abolished. After
protests from investment and business groups,
Alistair Darling, the Chancellor of the Exchequer,
announced that he would be introducing an
“entrepreneur's relief”, which means that gains
arising from the disposal of shareholdings in
trading businesses will be taxed at 10 per cent, up
to a cumulative lifetime allowance of £1 million.
However, since a property investment is not a
trading business, buy-to-let investors will not
qualify for this relief. Although taper relief is on
its way out, it is possible for some investors to
hold on to the benefits of indexation relief. “Draft
legislation confirms that it should be possible to
retain the benefit of indexation relief by giving
assets to your spouse,” says Mike Warburton, senior
tax partner at Grant Thornton.
CGT is not payable on your principal private
residence - your main home - although there are some
exceptions. If you use a part of your home
exclusively for business purposes, then that portion
of the property would not be exempt from CGT when
you sell it. For example, if a musician converts one
room in the house into a studio, it would count as
exclusive business use.
INHERITANCE TAX
Inheritance tax (IHT) is payable at 40 per cent on
the value of an estate that exceeds the IHT
threshold, also known as the nil-rate band, of
£300,000. Halifax figures show that the number of
owner-occupied properties in the UK valued at a
figure above that stands at 2.3 million - 12 per
cent of all owner-occupied homes. Although the IHT
threshold is due to rise to £350,000 by 2010,
Halifax estimates that, by 2020, 4.3 million homes
will be worth more than the nil-rate band if it
rises at the rate of retail price inflation.
STAMP DUTY
Stamp duty is payable at 1 per cent on properties
worth £125,001 to £250,000, 3per cent at £250,001 to
£500,000, and 4 per cent on properties of £500,001
or more. If you purchase a property in a
government-designated “disadvantaged area”, the
lower threshold for stamp duty is £150,000. If you
are able to find a zero-carbon home, no stamp duty
is payable up to £500,000.
Like the IHT thresholds, the stamp duty bands have
not kept up with house price inflation. Although the
threshold over which stamp duty is paid was raised
from £60,000 to £120,000 in 2005 and then to
£125,000 in 2006, the higher stamp duty bands have
remained unchanged since 1997, despite a 175per cent
increase in house prices over the same period. As a
result, total stamp duty revenue raised in 2006-07
was £6.4 billion, more than three times the 2000-01
total of £2.1 billion.
The lion's share of this tax is paid by homeowners
in London and the South East: there are ten local
authorities in which more than £50million of stamp
duty was paid in the 2006-07 tax year. Nine of these
are to be found in London, the exception being
Elmbridge in Surrey.
Stamp duty is controversial, not just because it has
been used to boost the taxman's coffers: the way in
which the tax is levied creates distortions in the
property market. The price differential between a
property sold for £249,000 and £251,000 is not, as
one might expect, £2,000. Once stamp duty has been
taken into account, the difference rises to £7,040.
COUNCIL TAX
One further tax burden on properties - albeit a
local tax rather than one for the Revenue - is the
council tax. This, too, has increased considerably
over the past decade, with the average bill almost
doubling from £564 in 1997-98 to £1,078 in this tax
year. Over the same period, retail price inflation
has been 31 per cent, while earnings have grown by
51 per cent.
Source: Times
Online, 29 February 2008
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