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Is the Taxman Cracking Down on Buy-to-Let Landlords?

Newsletter issue - July 07.

There have been some alarmist newspaper articles recently claiming the Taxman is about to crack-down on thousands of buy-to-let landlords. This is not the case, at present he has bigger fish to fry chasing those with undeclared off-shore bank accounts, but that doesn't mean that landlords are off the hook.

The problem with buy-to-let landlords is that many don't complete their tax returns correctly, or at all. There are possibly 500,000 landlords letting residential property in the UK, but the Taxman knows only about 300,000 people who complete the land and property pages of their personal tax return to report income from a let property. Some individuals may hold their let property through a company, in which case the rental income should be reported on the company's tax return not on the individual's, but others just forget to tell the Taxman about their lettings.

If you let a property, even one that used to be your own home, you must report the rental income on your tax return. This applies whether or not you actually make a profit from the letting. The income and all tax deductible expenses have to be shown to tell the Taxman you have made a loss for the year. You can't set that loss against your other income, unless the property is regularly let as furnished holiday accommodation, but you can carry the loss forward to off-set against future profits from a lettings business. If you don't claim the loss you won't be able to use it in the future.

The other problem is that landlords make mistakes about what to deduct as expenses from the rents received. Valid expenses include the costs of running the property from day to day, such as a management agent's fees, repairs, advertising for tenants and insurance. Tax deductible expenses do not include the costs of acquiring the property, such as stamp duty, estate-agent's, or solicitor's fees.

The interest you pay on any loans or mortgages connected with your lettings business is deductible, but not the repayment of the capital borrowed. If you have a repayment mortgage you must be careful only to include the interest part of the monthly payments on your tax return. The lender should break down the total you pay over a year into interest and capital repayments, and show this on your annual mortgage statement. We can help you make the right claim on your tax return for all your letting expenses.

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