Buy-to-Let and Capital Gains Tax: Get your Tax Return Right!

With thousands of buy-to-let landlords in the UK, it’s estimated about 20% of these are getting their tax returns wrong. Some are claiming too much interest on mortgage payments, some are understating rental income and others are not even registering with the HRMC at all. Buy-to-let investors must keep accurate records or they will face an inspection by the tax man. If landlords do realise they have made a mistake, they should seek tax advice immediately and contact the HMRC. For those deliberately evading tax, the HMRC are becoming tougher and will impose penalties as well as recover any tax plus interest.

With an interest only mortgage on your buy-to-let property, mortgage repayments are tax deductible. Tax relief can also be claimed on rental insurance, maintenance, agency fees, professional advice, ground rent and service charges. However, you will have to pay tax on your rental income. You will also be charged Capital Gains Tax if/when you sell the property unless you can prove it is your primary residence.

How does Capital Gains Tax (CGT) work? If you buy a property for £100,000 and sell it for £130,000, this gain of £30,000 is eligible for tax. Individuals are allowed to make a set amount of profit before they have to pay CGT. This figure stands at approximately £9200 per annum for 2007/2008. But what if you have more than one home? Many people now have their main family home and also have a cottage by the sea or perhaps a villa in the sun. Before purchasing a second property, seek advice from a good accountant from the very beginning and you can minimise the effect of Capital Gains Tax.