Unreported property income and gains
6th March, 2008
Given the buy-to-let boom of recent years, it is no surprise that H M Revenue & Customs (HMRC) believe that there are many investors out there who have failed to return (and pay tax) on either their letting income or the capital gain arising on the sale of such properties. The real surprise is that, to date, HMRC have apparently done so little to tackle the situation. That now seems set to change…….
On 18 February HMRC wrote on an informal basis to an initial sample of 500 people who file tax returns and, according to the information available to the taxman, are letting out one or more properties but not disclosing the income. Those individuals have been offered an opportunity to ‘come clean’ via a standard disclosure form. They are told that, in addition to tax and interest, they may be liable to a penalty in respect of income not previously disclosed.
This initial approach on the part of HMRC is likely to be widened out to cover all those in respect of whom they hold relevant information, whether or not they currently file tax returns. It should be borne in mind that, in addition to reviewing Land Registry records (and watching TV property shows with notebooks at the ready!), HMRC can demand access to the files of letting agencies and may be alerted by significant increases in bank balances following the sale of properties.
Those who have received one of HMRCs’ letters should take professional advice as a matter of urgency. They are under no obligation to provide the information requested, but if they do not do so the initial informal approach is likely to develop into a formal enquiry or, in extreme cases, into a criminal investigation. Particularly where the income or gains involved are significant, it is important to maximise available reliefs and ensure that any response to HMRC is framed in a way that is likely to minimise exposure to penalties (although generally rather lower, these can in some circumstances be as much as 100% of the tax).
Those who have not received a letter but who have so far failed to declare letting income, development profits or gains on the sale of a property that has not been occupied throughout as a main residence should also take advice now. Again, it is essential to maximise reliefs and to minimise penalties by ensuring that you have all of the relevant information ready, that it is carefully presented, and that you approach HMRC before they approach you.
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