The Office for Tax Simplification (OTS) has published a scoping document for a review of the taxation of property income, and mgr is taking part in the consultation process. This article examines the review.
The review’s focus is to identify opportunities to simplify the tax and administrative treatment of individuals, partnerships or micro companies that derive income from residential property.
HMRC statistics indicate that around 2.9 million individuals and 32,000 partnerships with property businesses filed tax returns in 2018/19, covering income from commercial or residential properties (including furnished holiday lettings) in the UK and overseas.
How is income from residential property currently taxed?
Individuals, and partners pay income tax on profits from renting property after deduction of certain expenses, including general maintenance and repair, letting agent and accountancy fees and some legal fees. Mortgage interest relief for residential property is restricted to a maximum of the basic rate of income tax, and there is no capital gains tax relief for interest or loans.
Special rules apply to furnished holiday lettings (FHLs), which are residential properties let short term that satisfy certain conditions. Income from FHLs attracts some extra reliefs (notably interest) in a similar way to trading income. Some capital gains tax reliefs are also available.
Under the Rent a Room Scheme, individuals who rent out furnished accommodation in their home get a tax exemption of up to £7,500 a year for the rental income from it.
Companies pay corporation tax on rental profits, and there are no restrictions on tax relief for mortgage interest as long as it is incurred ‘wholly and exclusively’ for the purposes of the rental business.
The review will consider the letting of property by micro companies but not lettings by larger companies or REITS. A micro company is one that satisfies any two of the following conditions:
- turnover of £632,000 or less
- £316,000 or less on its balance sheet
- No more than 10 employees
Scope of the review
The review will make recommendations for simplifying the taxation of residential property income and ways of addressing the distortions.
Specific areas to be considered include:
- The differences between the rules for residential lettings generally and those applying to FHLs
- how the taxation of property income fits into the overall scheme of income tax
- the factors that influence the choice between using the cash basis rather than accruals accounting where rental income is less than £150,000 a year
- reliefs and exemptions, including CGT aspects
- income received from property in the UK and income from property overseas
- difficulties arising in understanding the rules
- the potential for intermediaries to assist in easing administrative burdens
The review will also consider issues arising from life events or family circumstances and practical, technical and administrative issues, including in relation to Making Tax Digital reporting. This will start in 2024, and will apply to individuals anyone with gross rental and/or self-employment income in a year that, combined, is more than £10,000.
Carrying out the review
The OTS has published a Call for Evidence and an online survey in relation to the review. It will also be guided by contemporary research and consider the likely implications of recommendations on the Exchequer.
MGR Tax Partner Jill Springbett says:
“This review is welcome as the taxation of individuals, partnerships or micro companies deriving income from residential property has become an overly complex area. We are taking part in the consultation process. We have a lot of clients in the property sector, large and small and the whole system of tax on property is very complicated. Let’s hope they look at the other aspects too, soon, to simplify it all as far as possible.”
We will update you about the results of the review in due course.
Please contact us if you have any queries regarding the taxation of residential property income.
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.