TAX NEWS - June 2010

United Kingdom Tax: Government scores own goal by adandoning buy-to-let clampdown

The coalition government has scored an own goal by abandoning plans to regulate the private rented sector through a register of landlords, licensing of letting agents and compulsory tenancy agreements.  It was a golden opportunity to tighten up on widespread tax evasion.

Even market practitioners have suggested that abandonment of the buy to let plans is a retrograde step.  As Hugh Dunsmore-Hardy of estate agency Winkworth Franchising Ltd points out, 'estate agents are subject to statutory regulation and are required to provide routes to independent redress, whereas letting agents are not subject to such regulation.  Yet they have far greater access to clients' monies which remain unprotected.'

'Furthermore, evidence of variable standards of service by lettings agents across the country leaves either landlords or tenants in a precarious position when pursuing compensation for unprofessional and inadequate service. The new coalition government's decision to abandon very advanced plans by the previous Labour government that would have protected the interests of tenants and landlords is not a welcome move'.

The influential Association of Residential Lettings Agents has been critical too, saying it was 'extremely disappointed' by the government's decision, and that tenants were not being adequately protected. ARLA has long campaigned for the introduction of compulsory regulation of letting agents and points out that, 'currently, any person or organisation can become a letting agent.  Until that is changed via national regulation, unprofessional, unqualified and unethical operators will continue to exist, to the detriment and expense of consumers and the market as a whole.'

But there is a much more important reason for all landlords to be registered – tax evasion on a grand scale.  Nobody knows how many individuals own buy to let properties on which they receive undeclared income but the figure is likely to be high amongst small landlords.  Many pretend to believe that since most of the income is cancelled out by mortgage payments, they don't have anything to declare.

This is, of course, untrue since only mortgage interest and not capital repayments are offsettable against rental income. Even more individuals let out a second home, either in the UK or abroad, at 'mates rates' for cash and pretend it is a contribution to the running costs.

In addition, unless they declare the sale of a buy to let property or second home, they can easily evade Capital Gains Tax too – and many do.  There is virtually no mechanism for ensuring compliance with CGT legislation on property and CGT has often been described as a 'voluntary tax.'

It should not be beyond the wit of government to devise a simple registration system, perhaps operated by the Land Registry, whereby house purchasers would have to state whether a property purchase was a principle private residence or not.  This could be changed at a later date with a re-registration if the property ceased to be their PPP.  This could be cross referenced with tax returns and enquiries made by the tax man about potential undeclared income and CGT.  At the moment HMRC has no idea how many people own second homes or investment properties – and even less idea how many own property abroad.

The cost of compliance with this requirement would be nil since it would be just another item on the Land Registry forms and would be administered by the conveyancing agent or solicitor. The system could be programmed to throw up any cheating homebuyers who claim that more than one property is their PPP.  It would be 100% effective bringing every potential tax evader into the tax net over a period of time.  On average around one million properties change hands each year so it wouldn't take long before the vast majority were registered either as a PPP or a second home or buy to let property.

Much of this information could be acquired now.  According to the CML there are around 1.2 million buy to let mortgages in existence.   If HMRC obtained access to this information – as it has done with offshore bank accounts - it would be a simple matter to check whether income tax and CGT was being paid on these properties.  If HMRC is clamping down on undeclared interest and investment income held in offshore accounts, it is about time they did something on undeclared rental income.

Abandoning the Register of Landlords is probably no great loss since it would be difficult if not impossible to check on compliance.  But rounding up tax evaders ought to be a priority for this government.  The black market is huge and will become even larger if VAT rises to 20% as expected.

There are other, equally important, considerations too.  The abandonment of the requirement to provide a written tenancy agreement leaves tenants very vulnerable and open to exploitation by unscrupulous landlords anxious to evict tenants.  This was not a good move.