Hefty fines could be in store for owners of second properties who believe they do not owe income tax because rent revenue is swallowed up by mortgage payments.

They are being targeted by a fresh HM Revenue & Customs campaign against landlords who have not declared rent on their tax returns.

"HMRC believes this campaign will generate significant arrears from unsuspecting taxpayers," said Alan McCann, a director of tax at business advisers DTE.

"HMRC is confident of success because information from stamp duty land tax returns means it can match properties to individuals' declared principal private residences and take matters from there."

The campaign is initially a pilot exercise with an option to launch a major campaign depending on results.

HMRC sent a first batch of letters in February to people who complete SelfAssessment Tax Returns but have not declared rental income on previous returns.

"The letters are not formal enquiries and there is no legal obligation to respond," said Alan McCann.

"However, if no reply is received in the usual 30-day period, a reminder will be issued and if there is no response to this, HMRC will consider a formal inquiry.

"I would advise property owners to urgently review their tax position in relation to second properties generating rental income. If there is a tax arrears issue, coming forward with a voluntary disclosure could reduce any penalties "If a property was bought entirely or partly by funds from other asset sales you should consider whether there may be any additional capital gains tax issues."

9:00am Tuesday 13th May 2008

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