Click here to see how homeowners tax bills have risen in the past decade

It has been a long time coming, but HM Revenue & Custom's crackdown on buy-to-let investors has begun in earnest. The Revenue has been gathering lists of landlords from lettings agencies, according to Wilkins Kennedy, the accountancy firm, and has “launched a concerted compliance campaign” against buy-to-let investors. It is sending letters to hundreds of individuals who it believes own buy-to-let properties and have failed to declare their investments on self-assessment tax returns.

“Individuals who receive these letters need to take them seriously,” says Peter Goodman, a senior tax partner at Wilkins Kennedy. “If they do owe tax, they should consider early disclosure as part of a negotiated settlement. This may reduce the penalties they incur.” The Revenue's new campaign has highlighted the increasing tax burden on homeowners. Research from the Organisation for Economic Co-operation and Development (OECD) shows that property taxes as a percentage of GDP are higher in the UK than in any other developed country. They are also high as a percentage of the total tax take: in 2004 property taxes made up 12 per cent of total UK taxes, compared with a euro-zone average of 5.3 per cent.

The rise and rise of UK property taxes in recent years has in large measure been due to “fiscal drag”: it is not so much that tax rates have been raised, but that thresholds have been allowed to lag behind the rate of house price inflation. For example, had the inheritance tax threshold kept pace with house price increases since 1995, it would now be £460,000 rather than £300,000. Below we show how different taxes are putting the squeeze on homeowners:

INCOME TAX

Landlords are required to pay income tax on their profits at their marginal rate of tax. As with any other business, you can make deductions from your profits. Allowable deductions include mortgage interest payments, repairs to the property, insurance, letting agency fees and 10per cent of your total rental income to cover depreciation. Those investors targeted by the taxman will have to produce a detailed breakdown of costs such as repairs and professional fees.

CAPITAL GAINS TAX

Goodman believes that “the unpaid capital gains tax on buy-to-let investments could be huge”. Until April 6 this year, when the CGT system will be reformed, investors have been required to pay tax at 40 per cent on any gains over and above the annual allowance, which is £9,200 in the 2007-08 tax year and £9,600 in the 2008-09 tax year. Landlords who have held their investments for several years can, until April 6, benefit from taper relief, which reduces the amount of CGT payable by 5per cent after three years, up to a maximum of 40 per cent.

Taper relief was introduced in 1998 to replace indexation relief, but that still applies to properties purchased before then. It allows anyone selling an asset to uplift the base cost of that asset for CGT purposes, increasing its value by the rate of inflation.

After April 6 a new CGT regime will be introduced. Under the new system, the CGT rate falls to 18 per cent but taper relief will be abolished. After protests from investment and business groups, Alistair Darling, the Chancellor of the Exchequer, announced that he would be introducing an “entrepreneur's relief”, which means that gains arising from the disposal of shareholdings in trading businesses will be taxed at 10 per cent, up to a cumulative lifetime allowance of £1 million. However, since a property investment is not a trading business, buy-to-let investors will not qualify for this relief. Although taper relief is on its way out, it is possible for some investors to hold on to the benefits of indexation relief. “Draft legislation confirms that it should be possible to retain the benefit of indexation relief by giving assets to your spouse,” says Mike Warburton, senior tax partner at Grant Thornton.

CGT is not payable on your principal private residence - your main home - although there are some exceptions. If you use a part of your home exclusively for business purposes, then that portion of the property would not be exempt from CGT when you sell it. For example, if a musician converts one room in the house into a studio, it would count as exclusive business use.

INHERITANCE TAX

Inheritance tax (IHT) is payable at 40 per cent on the value of an estate that exceeds the IHT threshold, also known as the nil-rate band, of £300,000. Halifax figures show that the number of owner-occupied properties in the UK valued at a figure above that stands at 2.3 million - 12 per cent of all owner-occupied homes. Although the IHT threshold is due to rise to £350,000 by 2010, Halifax estimates that, by 2020, 4.3 million homes will be worth more than the nil-rate band if it rises at the rate of retail price inflation.

STAMP DUTY

Stamp duty is payable at 1 per cent on properties worth £125,001 to £250,000, 3per cent at £250,001 to £500,000, and 4 per cent on properties of £500,001 or more. If you purchase a property in a government-designated “disadvantaged area”, the lower threshold for stamp duty is £150,000. If you are able to find a zero-carbon home, no stamp duty is payable up to £500,000.

Like the IHT thresholds, the stamp duty bands have not kept up with house price inflation. Although the threshold over which stamp duty is paid was raised from £60,000 to £120,000 in 2005 and then to £125,000 in 2006, the higher stamp duty bands have remained unchanged since 1997, despite a 175per cent increase in house prices over the same period. As a result, total stamp duty revenue raised in 2006-07 was £6.4 billion, more than three times the 2000-01 total of £2.1 billion.

The lion's share of this tax is paid by homeowners in London and the South East: there are ten local authorities in which more than £50million of stamp duty was paid in the 2006-07 tax year. Nine of these are to be found in London, the exception being Elmbridge in Surrey.

Stamp duty is controversial, not just because it has been used to boost the taxman's coffers: the way in which the tax is levied creates distortions in the property market. The price differential between a property sold for £249,000 and £251,000 is not, as one might expect, £2,000. Once stamp duty has been taken into account, the difference rises to £7,040.

COUNCIL TAX

One further tax burden on properties - albeit a local tax rather than one for the Revenue - is the council tax. This, too, has increased considerably over the past decade, with the average bill almost doubling from £564 in 1997-98 to £1,078 in this tax year. Over the same period, retail price inflation has been 31 per cent, while earnings have grown by 51 per cent.

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