Your guide to the proposals to simplify income tax for residential landlords

The Office of Tax Simplification (OTS) published a call for evidence in July 2022 on how to make taxing the income on residential properties in the UK simpler and how to increase understanding of landlord obligations. The recently published outcome for the call for evidence presents proposals for "possible action over the short and medium term", potentially affecting 2.9 million individual taxpayers. 

What's covered in this guide?

1. Clarifying Making Tax Digital for Income Tax for landlords
2. Taxing the cost of repairs, replacements, and improvements
3. Furnished holiday lets and the separate tax regime
4. Allocating income tax on jointly-owned property
5. Simplifying property tax for non-UK resident landlords

1. Clarifying Making Tax Digital for Income Tax for landlords

In April 2024, new rules will come into effect requiring applicable landlords - around 1.38 million - to keep digital records and submit their income tax returns via Making Tax Digital (MTD) compatible software.

Landlords and their agents have raised three concerns about this new requirement:

• How this will work for jointly-owned properties
• Whether third parties can access MTD to submit relevant data on behalf of the landlords, to support their income reports
• That the cost and compliance burden of setting up MTD may outweigh the low net profit landlords will likely earn at the lower limit of the £10,000 "gross rental limit" that will be required to adopt MTD

The OTS report has therefore recommended:

• Establishing a system for filing income tax reports for jointly-owned properties
• Expanding the scope of MTD to authorise filing agents to support on report submissions on behalf of relevant landlords
• Increasing the income threshold to more than £10,000, "at least for the medium term"

2. Taxing the cost of repairs, replacements, and improvements

The OTS report highlighted that landlords - and HMRC staff - need more clarity on when costs for repairs or replacements are allowable immediately, or should be disallowed for income tax. It therefore recommends updating the guidance on this topic.

It has also suggested creating a more all-encompassing income tax relief for property costs, aside from where the work is a capital cost of the building. These costs still wouldn't be allowable under Capital Gains Tax.

This recommendation aims to "support the government’s objective in improving the environmental standards of rented property, by offering certainty of tax relief for those costs".

3. Furnished holiday lets and the separate tax regime

The report highlights that furnished holiday lets - including around 127,000 lettings businesses declared to HMRC - currently enjoy "more favourable tax treatment" than long-term let properties.

The report debates whether a separate tax regime for this category of short-term lets is beneficial or if "many would currently use that regime as a proxy for many of the benefits of the trading rules.”

It recommends that, if the separate regime were abolished, a test should be introduced to define if the business owner is "trading".

If, however, it were to keep the separate system, the report says that refinement is needed. Tax on furnished holiday lets in the European Economic Area (EEA) can currently be treated the same as in the UK. As the UK isn't part of the EEA, the OTS recommends either expanding this treatment globally, or limiting this tax regime to the UK.

4. Jointly-owned property and income tax allocation

The taxable profits allocated to each taxpayer renting out a property jointly with a spouse or civil partner is currently split equally, unless a Form 17 is completed - affecting around 1.5 million individual taxpayers. Other forms of joint ownership will split those taxable profits according to beneficial ownership - and they can choose how they split this allocation.

The OTS report recommends aligning income tax for joint ownership with that for Capital Gains or inheritance tax, removing the 50:50 rule for spouses and civil partners.

5. Property tax for non-UK resident landlords

Non-UK resident landlords are currently taxable on their UK based rented property, whether or not they're already taxed in their country of residence. This means registering for Self Assessment and filing UK tax returns.

The report highlights that these landlords struggle to access the appropriate online systems to file their taxes.

The OTS therefore recommends:

• Making it easier for landlords to access the relevant log in details to manage their taxe online
• Give landlords access to the online self-assessment tax return process, rather than having to submit paper documents
• Improving clarity on claiming a personal allowance as a non-UK resident and make timelines clearer for paper-based tax returns

For more information on the OTS policy paper, "OTS Property income review: Simplifying income tax for residential landlords", visit gov.uk.