Landlord tax crackdown - Telegraph The issue is gaining significance not merely because of the taxman's greater interest. After the financial crisis and the stagnant property market that followed, many people became "accidental landlords" when they moved home because they were unable to sell. A sharp recovery in property values, especially in London and the South, could also mean people now selling have a capital gain to declare. Simon Whittaker of landlord mortgage broker Mortgages For Business said: "Some people who kept hold of property when the market was weak will look to sell now, and that could mean a need for some owners to plan around the tax." Smaller landlords with one or a few properties are likely to declare property earnings via self-assessment. Liabilities arising from the 2012-13 tax year need to be paid by the end of January. Larger landlords will probably use accountants, said David Lawrenson, founder of landlord website Lettingfocus.com and author of Successful Property Letting. He said: "I think a lot of landlords might use an accountant for a year or two and see how a professional handles elements of the return, such as allowable expenses, and then after that they may choose to do it on their own." Income arising from rental property is treated very differently from gains made when properties are sold. As a rule of thumb, income can be legitimately reduced to the extent that most landlords need not pay tax. It is more difficult to avoid being taxed on gains - where landlords face either the capital gains tax regime, or, at their death, inheritance tax. Many measures are available to landlords to reduce their income tax liabilities... Mortgage interest is the chief cost which landlords are allowed to offset against incoming rent, thus reducing taxable income. So to some extent it pays to be "mortgaged up," which is why landlords tend to use interest-only loans where the capital is not repaid. Interest-only borrowing also makes tax returns easier as there is no need to strip the capital repayment element of the mortgage (not tax deductible) from the interest costs. With many landlords seeing interest bills falling during the crisis, as mortgage rates tumbled, an incentive arose to increase borrowings to buy more properties. Mr Giddens said: "It is surprising how many of our clients maintain substantial mortgages on their let properties. Some are releasing equity. On the whole they are not making large incomes. But mortgage interest is not the only expense which landlords can legitimately use to offset rent. Repairs and maintenance outlays are also allowed, provided they are not "improvements." As a result some landlords have used this period of low interest rates to raise finance to undertake big repairs to roofing, for instance - in what is both tax-effective and helpful in bolstering the property's value. Lettings agents" fees, mortgage brokers" fees, ground rents, service charges, insurance, accountants" costs and other staff expenses incurred in the business of letting the property are also allowed. The list is substantial. ...but taxable gains are more of a problem David Cox of the National Landlords" Association, the biggest trade body for landlords, spelt out the problem: "Most serious landlords are in business for the long-term and so do accrue capital gains. Any landlord selling up now, for instance, who bought in the Nineties, is likely to have a substantial tax bill. There are two basic ways of limiting a capital gains tax bill on selling an investment property. The first is to ensure you deduct all the allowable costs from the gross gain. These include stamp duty paid and the cost of any improvements. Landlords should apply all allowable expenses to produce a lower net gain which would then be subject to capital gains tax. The second means of reducing the taxable gain is through making use of allowances associated with your having lived in the property. As anyone who followed the scandal of MPs "flipping" properties will recall, tax breaks associated with properties in which the owner previously lived are generous - if complicated. If a property has been your main home, at any point, you can usually claim tax relief for the last three years" ownership. There is another relief called private letting relief, which could allow a further £40,000 of any taxable gain to be avoided. More serious landlords who build a portfolio of multiple properties over many years will battle to legitimately avoid both capital gains or inheritance tax, however. How will HMRC track non-payers down? For several years the taxman has made clear that it is beefing up its resources to trace tax evasion, and those property owners not paying their dues are among its stated targets. HMRC has a number of tools at its disposal. First comes the "big picture" approach, say accountants, by which the tax authorities trawl their own records. Using data about taxpayers" declared income and other assets, for instance, helps it identify segments of the population likely to own properties in addition to the homes they live in. Then, after that broad approach, it can narrow sharply down on to suspect groups and individuals. And here HMRC has a lot of weaponry at its disposal. It can cross-check taxpayers" records with Land Registry data and, if it wishes to, can go on to request data from third parties such as lettings agents. Banks are another source of information, as taxman can ask for information about mortgages advanced to landlords. When asked, these organisations have to oblige. Since 2007, when tenancy deposit protection rules came into force, all rental deposits have had to be protected by an authorised deposit scheme. The measure was designed to protect tenants but it added a useful string to HMRC's bow. The schemes have to collate data about both landlords and properties - again accessible to tax officials. On top of this, many councils are actively updating their registers of landlords. And the net can tighten further. Mark Giddens, a partner at accountant UHY Hacker Young, said: "It is not beyond investigators to trawl the internet looking for property adverts. Most landlords have to advertise. Stuart Law, head of property firm Assetz and owner of a large portfolio of properties, said: "There are a myriad ways that HMRC can throw up these cases of unpaid tax, such as following up adverts in local newspapers or trawling data on buy-to-let mortgages, to name but a few. Simply being too busy to file a tax return is not an excuse. David Lawrenson of landlord forum Lettingfocus.com said: "Failing to declare property interests is in most instances probably because landlords aren't making any money. Those who took out mortgages in recent years are probably paying high rates and not clearing a profit after expenses, and therefore think they do not need to file a return. This would be incorrect, however. "Whether you make a profit or loss or neither you need to inform HMRC of your activity and file a return," he said. Stay abreast of the latest news relating to property, tax and much more - sign up to our weekly Money newsletter here