The British housing market could take 20 years to recover says one of the City of London’s leading investment banks.

In a note to clients, Mark Hake, an analyst at Merrill Lynch said ” … it looks significantly worse [than the 1990 downturn], with house prices falling faster and further and very little recovery in real terms expected over 20 years. … House prices are expected to be below their August 2007 peak in a further 10 years’ time.”

The investment bank forecasts house prices to fall 17 per cent this year, while inflation is set to continue its upward march in coming months as the economy absorbs the effects of higher oil and food prices.

If that were not bad enough, David Kern, economic advisor to the British Chambers of Commerce, thinks unemployment will rise to nearly two million by the end of 2009. He commented, “The results of this survey signal a menacing deterioration in UK prospects We are now facing serious risks of recession. London appears pretty weak and it’s across the board. Businesses are in a lose-lose situation. Falling demand and the squeeze on consumer disposable incomes will limit how far prices can be increased.”

With Nicola Horlick warning us off shares for three years, there aren’t many places left to put our funds.

As RBS’s credit analyst said last week, cash is the only safe haven now.

It’s emerging that the British tax authority Revenue & Customs believes tens of thousands of buy-to-let landlords are error-prone in their tax returns. So much so that reports have suggested a crackdown by the Revenue.

However, a spokesman responds, “The idea that we’re dragging in hordes of buy-to-let investors to face some medieval inquisition is just so wide of the mark.” They are, he said, worried that many people are confused about the tax regime, and up to 80,000 may be paying the wrong amount.

Letting property carries a much more complex tax calculation than the normal buying and selling of houses. In many cases it may be that investors are not claiming all their allowances and therefore overpaying.

There is a long list of expenses that can be claimed against rental income. The most obvious one is interest on any mortgages used to buy the property. Capital repayments, however, are not covered by this.

Landlords can also claim 10 percent of annual rental for “wear and tear”, effectively depreciation of furnishings, fittings and the fabric of the house. Insurance is also deductible, as are fees paid to managing agents. Legal and accounting fees are included too.

If you sell the property you must pay 40 percent capital gains on the profit, unlike your main residence which is exempt. However, the first £9,200 of profits in any year are free from tax.

If you have owned the property for more than three years, you can save 40 percent on CGT, and there’s further relief if you have lived in the property. One ploy used by canny landlords is to let their own house for six months, while living themselves in a rental property due for sale, thus eliminating CGT altogether.

As with any relationship with the Revenue, it pays to be on top of the detail.

In the UK, buy-to-let property has been a top target for many investors, big and small. Many people are entering the thriving market as a substitute for pensions.

Now, it seems, the prospects are not so good, as interest rates rise, putting pressure on borrowers, and house prices start to fall. Worse, landlords will be hit harder than the lenders in the prevailing conditions.

Indicative of this, the share price of Paragon, Britain’s biggest buy-to-let lender, has fallen 20 percent this year. This is despite the firm being the most conservative mortgage lender in the sector. Only 0.15 percent of its lending book is in arrears, compared with 0.64 percent across the buy-to-let market, and 0.89 percent in the mortgage sector as a whole.

The company asserts, however, that landlords generate 125 percent of their mortage costs, giving Paragon some protection from a downturn. Similarly, it makes 90 percent of its money from its backbook, so plummeting mortgage applications won’t hit it very hard.

Paragon shares might just be a good buy, despite the state of the market. Whether landlords with their pensions tied up in property will see it that way, remains to be seen. Play it long, is good advice here.