It is when buy-to-let landlords come to sell up and reap the profits of their investment that the taxman comes up from behind and bites them hard.
Capital gains tax (CGT) now stands at 40 per cent for those in the higher tax bands, so anyone who has owned a property for more than a few months could be liable to pay a large sum if they have not planned in advance.
In the past, some landlords have omitted to mention capital gains to the taxman, but it is now very difficult to get away with this. HM Revenue and Customs is planning an offensive against buy-to-let, especially people who have bought properties abroad.
An amnesty has been offered to taxpayers who may have been underpaying: if they come clean by 22 June and pay the outstanding balance by 26 November, they will be charged a penalty of 10 per cent and interest of 7 per cent per annum on the shortfall. This compares with a maximum penalty of 100 per cent and possible criminal prosecution for deliberate tax evasion.
Offshore investors wishing to take advantage of the amnesty must visit https://disclosures.hmrc.gov.uk to own up. UK landlords must visit their local tax office.
"Immediately after the notification period ends on 22 June, we will target offshore bank account holders with undisclosed income and gains who do not make a disclosure," a HMRC spokesman said. "We met with representatives of the accountancy profession recently for their views on how we can best inform landlords of their existing obligation to report their property income to us and how we can help landlords to make accurate returns."
There are several legitimate ways of reducing CGT exposure. The main one is taper relief, which reduces the tax payable according to the length of ownership by up to 40 per cent.
Married investors, and others in long-term relationships, can reduce the tax payable by giving the major share in the property to the partner paying least tax, advises Maurice Patry, a chartered accountant at Landlords Tax Services (www.landlordstax.co.uk).
"If the property is owned jointly, that can double the amount you can get tax-free, especially if one is paying a lower rate of tax," he says.
Another good way for a landlord to reduce their CGT commitment is to use the place as their main residence for a while.
"If you live in the property at any time during your ownership, the tax relief is enormous," Patry says. "I know a landlord who changes his address every few months to live in all his properties."
The drawback is that the move must be genuine, not just a few overnight stays.
"You have to move all your effects in, have a housewarming party and get on the electoral roll at your new address," Patry says. "There was a recent case where a farmer tried moving into a cottage on the farm during void periods, but the fact that he took his laundry back to his wife 400 yards away blew his argument."
The reverse situation, where a householder rents their main residence out while they work overseas, for example, can also render them unwittingly liable for CGT, so accurate records of the total period away must be kept.
At the extreme, landlords can escape CGT entirely by living abroad, but they will not be able to return at all in that period except for funerals of close relatives or life-saving operations.
"I have a client who didn't like CGT so upped sticks with his wife and six children and has gone to Cyprus for five years, so he won't have to pay it," Patry says. "You must not sell between the date you leave and the next 5 April, but otherwise you can sell at any time in the next five years and pay nothing."Reuse content