HMRC Campaign to Solve Tax Leakage On Property
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In the first of a series of new style interventions, HMRC have begun a
campaign of compliance checks into property income.
The campaign targets people who receive income from property but have not
disclosed it to HMRC.
The recent announcement of the HM Revenue & Customs (HMRC) property campaign,
i.e. that there will be compliance checks was presumably planned before the
“credit crunch”. The reality is the review will be in the aftermath of Capital
Gains Tax (CGT) reform.
Many small investors in property have been aiming for capital growth and have
been oblivious to the disclosure requirements regarding income and the claim for
expenses, e.g. interest paid often exceeded the rent received and many property
owners did not see the need to disclose.
For various reasons in the current property and mortgage climate there could
be some dynamic activity in the property sector with interesting tax
1) Forced sales due to mortgage problems by property owners. 2) “Buy to let”
entrepreneurs “snapping up” properties resulting from (1). 3) Increased and
planned sales due to the improved 18% CGT rate – but are the buyers and mortgage
HMRC Compliance Checks
So what was planned by HMRC compliance checks with regard to property checks
and increased tax collection?
The campaign may be part of a wider information gathering exercise as HMRC
state that “the engagement will also provide an opportunity to inform HMRC about
the potential for future capital gains tax liability”. Recipients should not
ignore these intervention letters, even if they have not made profits on their
letting or profits on property sales. The rental sector produces lots of
information to which HMRC has access. Information from the Land Registry and
stamp duty details are freely available. Voters lists and local authority
records are often reviewed.
HMRC have said that, where the taxpayer has authorised an agent to act for
him, they will send the query to the agent, with a copy going to the taxpayer.
When a property is sold there could be a CGT liability.
Many taxpayers might be unable to sell their property when they planned to
due to the credit crisis and they may be forced to let out the property. There
are a number of taxpayers who are unaware of the “main residence letting
So how does the relief work?
Provided that at some time during the period of ownership, a particular
property has been the only or main residence (by fact or election), the gain
attributable to a period of letting is relieved, up to a limit under s.223(4)
TCGA 1992. The amount relieved is the lower of the amount protected by owner
occupation relief and £40,000. The lettings relief is given to each of the
husband and wife provided that at the time of the letting he/she had an interest
in the property. This does provide an opportunity for future planning points.
HMRC looking to solve tax leakage
There have been press reports following a number of meetings between
professional bodies and HMRC, at which HMRC expressed its concern about what it
perceived to be substantial tax leakage in the area of property.
In the last decade there has been a large rise in the number of people owning
more than one property. Some properties are purchased as holiday homes or to
help children onto the property ladder. Many more investors look to let-out the
additional property and, in due course, realise a capital gain on their
investment. There has been a large amount of non-disclosure which is often
Accountants looking to provide a support structure to the property market
It would appear that perhaps most firms of accountants need a “property
helpline” to deal with all the problems that are facing clients and potential
It would appear that there are a large number of potential new clients
needing help and advice on both the property tax compliance and planning and
then everything will run much smoother if the property owner makes a “proactive”
visit to a firm of accountants for help as opposed to a “reactive” visit once
HMRC have contacted the property owner with a number of questions…
Empty Property and VAT
It might seem all doom and gloom for those with a property empire but there
is some good news to present. Should the property stay empty for two years then
there is a VAT advantage. Regulations have been published to amend paragraph 3
of the Notes to Group 7 of Sch 7A, Value Added Tax Act 1994. The effect of the
change reduces from three years to two years the period of time for which
qualifying residential premises must be empty before supplies of qualifying
services and building materials used in their renovation or alteration may be
charged at the reduced rate of VAT of 5%.
Phew! What a relief for all those landlords who might have property that they
want to let out, stand empty whilst the mortgage interest racks up. When the
property has to be renovated/altered there will be a reduced rate of VAT. Thank
Sympathy with HMRC
HMRC must be faced with quite a dilemma. Property is clearly an area of
potential extra “tax take” (someone has to pay for the hospitals and schools)
and one that must be featured regularly on the HMRC “shop on-line” service, i.e.
neighbours and contacts who know some property owners are escaping the “tax net”
and the tax compliance. However, there is financial suffering by families in the
current climate and a sensitive approach will be required.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN:
0754522180 (2nd edition) and Equine Tax Planning ISBN:
0406966540. The third edition of Tax Planning For Farm and Land
Diversification is currently being written and will be published shortly.
To order a copy call Tottel Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2008-08-04 14:40:32 in Tax Articles