Landlords warned not to disguise property profits

Image caption,
Property sales are being scrutinised much more closely by HMRC

Buy-to-let landlords have been warned not to disguise their profits from the taxman after selling their properties.

Accountancy firm UHY Hacker Young says tax officials are increasingly trawling through Land Registry records to check the accuracy of tax returns.

If a property is not a seller's main residence then capital gains tax (CGT) may be payable on the profit.

Hacker Young said special investigators were raising £10,800 for each special enquiry, up by 79% in two years.

The amount of money raised from each investigation rose despite the fact that the number of special enquires actually fell - down by 31% from 9,900 in 2007-08 to 6,800 in 2009-10.

"This is a massive increase in capital gains tax from enquiry work, particularly as the [total] amount of CGT payable has collapsed as asset values slumped during the recession," said Roy Maugham, tax partner at UHY Hacker Young.

"It shows just how aggressive HM Revenue & Customs [HMRC] is becoming in tackling tax evasion in this area."

Bigger effort

The increased cash being found by the tax authorities was revealed by Freedom of Information Act requests lodged with HMRC by Hacker Young.

They reveal that in 2007-08 the special investigation teams of the Revenue raised £60m in extra CGT while two years later they raised £74m - an increase of 23%.

The work was conducted by teams of special investigators set up in the past three years in the regional offices of HMRC.

Their establishment has come alongside the Revenue's widely publicised campaign to uncover people who are hiding taxable income in offshore bank accounts.

"We risk assess returns using a variety of methods, as well as cross-matching database information, both our own and external," said an HMRC spokesman.

"Enquiries into the disposal of second homes is just one area we look at," he added.


CGT is payable on the sale of most assets, not just property.

But Roy Maugham explained that in his firm's experience, a few buy-to-let landlords seemed prone to flouting the rules.

"It is something we are seeing, especially where they do not use an accountant," he said.

"There are quite a number of people who won't have reported it [the sale of their property] in the first place.

"They think they can get away with it," he added.

About 130,000 people paid capital gains tax in 2008-09.

The rules

The profit made on selling a property is liable to CGT unless it is someone's main home at the time of the sale, or was their main home at any time in the three years before.

Sellers also have an annual tax-free allowance of £10,100 to set against any CGT bill.

Even if there is still CGT to pay, a landlord can reduce the bill by offsetting:

  • the cost of buying the premises, such as stamp duty, legal and surveyor's fees
  • the cost of selling the property, such as legal or estate agent's fees
  • the cost of any enhancements at any time in the period of ownership, such as a loft extension or garage or conservatory.

Roy Maugham said it appeared that HMRC investigators were increasingly challenging "enhancement" claims on tax forms because they were really for things like painting and decorating.

Such items do not qualify for tax exemption as they are not capital expenditures.

"The landlords sometimes feel they have had the costs but can't prove it, because they haven't kept the necessary paperwork," Maugham said.

"Many HMRC investigations lead to disagreements over whether some costs are repair costs or enhancement to the property.

"HMRC often challenges the records for expenditure going back 20 years or more," he warned.

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