Revenue launches crackdown on buy-to-let landlords

HM Revenue & Customs has launched a crackdown on the buy-to-let market, doubling its efforts to track down amateur landlords who are not paying tax on earnings from their second property.

This week, HMRC sent hundreds of letters to individuals who it believes may not have declared their buy-to-let properties on their tax return.

According to the accountancy firm Wilkins Kennedy, HMRC has been gathering lists of landlords from lettings agencies for years, and is now following up some of these leads. The letters ask taxpayers and their accountants to provide details of their property investment activity over the past six years, and request a detailed breakdown of costs such as repairs and professional fees.

Peter Goodman, a senior tax partner at Wilkins Kennedy, said: "There has often been speculation that HMRC would start a compliance drive against landlords, but up until now inquiries have been pretty piecemeal. This is a real change in tactics for HMRC.

"Individuals who receive these letters need to take them seriously. If they do owe tax, they should consider early disclosure as part of a negotiated settlement. This may reduce the penalties they incur. People who refuse to co-operate with HMRC on this could ultimately face criminal prosecution."

Mr Goodman added that rising rents in recent years may mean that even highly leveraged buy-to-let investors may be making a profit from their investment that they need to pay tax on.

A spokesman for HMRC said 500 letters were being sent out initially, after which an evaluation would be carried out before any further action is taken.

John Cassidy, a partner at the accountants KF Tax, said: "Over the past few years, HMRC has geared itself towards tackling tax evasion and avoidance and it intends to use the information it has to seek out evaders in a systematic fashion across the board. Those who did not receive a letter this week and bel-ieve they may have escaped the Revenue's grasp should note that this is only a pilot exercise for ongoing interventions that will start later this year."

The buy-to-let market has slowed down in recent months, as the credit crunch has made mortgages harder to come by and falling house prices have discouraged some investors from entering the market.

Last month, Paragon Mortgages, one of the UK's largest buy-to-let lenders, was forced to carry out an emergency rights issue, to raise more capital to fund new business.

However, Melanie Bien, a director at the independent mortgage broker Savills Private Finance, said she believed the increased demand for rental properties would prop up the market. "Conditions are tougher in the buy-to-let market with lenders pricing risk more carefully, making it harder for landlords seeking finance," she said. "But the good news is rents are rising and demand for rental property remains high as first-time buyers continue to struggle to get on the housing ladder and need somewhere to rent in the meantime."