Tax watch: buy-to-let landlords beware

published 29 January 2008

As the 31 January self-assessment deadline looms, buy-to-let landlords should be aware that the taxman has his beady eye on you, says David Budworth in The Sunday Times. So far the Revenue has concentrated on ensuring that buy-to-let investors pay the correct tax on rent and capital gains; now, having spotted that some are underpaying, they are turning their attention to landlords with capital-repayment mortgages.

With a repayment mortgage, part of your monthly mortgage payment goes towards paying interest, while the other slice is used to repay the capital. Buy-to-let landlords can claim tax relief to reduce the tax they pay on the rental income, but only on interest payments.

The Revenue thinks that many people are breaking the rules by claiming relief against the whole amount. For example, if you have a 25-year £100,000 repayment mortgage, you would repay £675 at 6.5%, £540 of which goes towards interest and £135 of which is a capital repayment. That £135 should not be included when claiming tax relief. To find out what your own figures are, contact your mortgage lender.