In this report the Office of Tax Simplification (OTS) considers the UK taxation of income from residential property, primarily in relation to individuals. Nearly one in ten Income Tax payers have income from property, underlining its importance within the UK economy and tax system.
Across the spectrum of sophistication and scale of activities, the 2.9 million property businesses reported by individuals to HMRC for income tax must face the rules for taxation of income from property. This report contains findings and recommendations to help reduce complexity and enhance understanding of taxpayers’ obligations.
Key findings
- Although the furnished holiday lettings regime can provide some tax benefits, it is not widely used and adds a complex layer to the tax rules which apply to property income. The government should consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
- The report recognises that removing the furnished holiday lettings regime could put pressure on the boundary between whether a taxpayer has a property business or a trade, and recommends the government consider whether it would be appropriate to introduce a statutory ‘bright line’ test to define when a property business should be handled under the trading rules.
- Should the government wish to retain the furnished holiday lettings regime, the report recommends that the government consider removing the benefits for properties in the EEA and removing the benefits where there is private use (other than a minimal level).
- The report reflects the weight of feedback on the long-standing tax complexity for landlords of whether costs are allowable straight away as repairs and replacements or should be disallowed for Income Tax as capital improvements, and recommends the government consider a broader immediate Income Tax relief for the majority of property costs. This would also support landlords in obtaining better EPC rating certificates, as is proposed by BEIS.
- Nearly half of landlords will be filing for Making Tax Digital for Income Tax in respect of jointly-owned property. It is common practice for only one of the owners to keep records, and the report recommends that HMRC should establish a system to allow this practice to continue for Making Tax Digital. The report also notes the importance of HMRC accepting multiple agents to help with the new tax filings and recommends that HMRC should not go ahead with Making Tax Digital until these issues have been resolved.
Taxation of income from residential property
This report also covers the general regime for property and the confusion and challenge raised by large numbers of respondents about matters such as the allocation of income between joint owners, and in relation to rules which cause significant distortions or complexity such as the circumstances for diversified agricultural businesses.
The report looks in detail at how Making Tax Digital for Income Tax will affect landlords, and questions whether the initial and medium term threshold for entry into the new system should be increased above £10,000.
The report looks at non-resident landlords and encourages HMRC to make it easier for them to register for and report their income online for UK tax purposes. It also recommends that the government should consider removing the obligation on individual residential tenants in some situations to withhold tax from their rental payments to non-resident landlords.
Notes for editors
- This is an own initiative review by the Office of Tax Simplification (OTS) reflecting the responses to the OTS’s Call for Evidence and survey exploring the taxation of residential property income.
- The survey was completed by 3,559 individuals, the highest survey response the OTS has received. Insights from this were added to the ideas, analysis, and challenge provided by stakeholders over the course of over 35 meetings and 27 written submissions.
- About 2.9 million property businesses are reported to HMRC by individuals every year, only around 127,000 of which are in the furnished holiday lettings regime (111,000 in the UK and 17,000 in the EEA). About 1.4 million properties are jointly owned. HMRC estimate that around 1 million landlords’ property income turnover meets the £10,000 threshold to bring them into Making Tax Digital for Income tax, with around a further 380,000 landlords with combined turnover from property income and self-employment to meet the threshold.
- The OTS is the independent adviser to government on simplifying the UK tax system. The OTS makes recommendations for the government to consider. It does not implement changes; that is a matter for officials and ministers.
- The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden, which is what people encounter in practice, as well as looking to simplify the rules. Simplification of the technical and administrative aspects of tax are important, both to taxpayers and to HMRC.
- The government announced on 23 September as part of The Growth Plan 2022 fiscal event that the Office of Tax Simplification will be closed.
- As the Office of Tax Simplification is a statutory body, this closure will take effect when the next Finance Bill receives Royal Assent.
- The OTS will complete one more report after this, on Hybrid and distance working
