OTS review of residential property income

The Office of Tax Simplification (OTS) has published its report ‘Property income review: simplifying income tax for residential landlords’. This explores the common complexities, issues, and concerns facing individual taxpayers with property businesses.

The OTS’s report notes that almost one in ten Income Tax payers has Income from property.

With around 2.9 million individual taxpayers subject to the property income rules, the OTS considered how complexity may be reduced and the understanding of taxpayers’ obligations enhanced.  

In its 113-page report, the OTS made a number of findings and recommendations. These included:

Furnished Holiday Lettings (FHLs)

• The government should consider whether there is a continuing benefit to the UK in having a separate tax regime for Furnished Holiday Lettings (FHLs).
  • HMRC's 2019-20 data recorded only 127,000 FHL businesses, including 17,000 in the European Economic Area (EEA).
  • Key benefits of the FHL regime were considered to be the availability of full relief for Finance costs, and Business Asset Disposal Relief on sale.
  • Respondents were generally neutral on the benefits of the regime compared to its administration. Others felt the scope of businesses obtaining the relief was too wide.
• If the FHL regime is abolished, it should be considered whether:
  • Certain property letting should be treated as Trading for Income Tax purposes.
  • It would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
• If the FHL regime is retained, the government should consider:
  • Extending the regime to worldwide properties, or restricting it to only UK properties.
  • Limiting it to properties used for commercial letting by removing the potential for personal occupation.

Repairs, replacements and improvements

• Guidance should be enhanced on the boundary between Repairs and improvements.
  • This should include clear examples of common situations.
  • Flowcharts could be used to lead towards case-by-case answers.
• Consideration should be given to making Income Tax relief immediately available for all property costs, other than where work is part of the capital cost of the building such as on initial fit-out or extensions.
  • This should be simpler to administer and would align with the desire to improve the environmental standards of rented property.

Jointly owned property

• The government should consider removing the default 50:50 income allocation rule for spouses and civil partners.
  • The current rules surrounding Property owned jointly by spouses/civil partners were viewed as complex and burdensome, potentially leading to non-compliance.
  • This change would align treatment to that of other joint property owners and to the position for spouses/civil partners in respect of Capital Gains Tax and Inheritance Tax.
• Consideration should be given to removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

• HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties. For example, by making a jointly owned property the MTD filing entity.
  • Almost half of landlords will be filing in respect of jointly owned property but in many cases, only one party will keep the records. This will make filing difficult for the co-owner.
• HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents.
  • Letting agents and bookkeepers may maintain digital records and support quarterly submissions. They will need to be authorised for filing, alongside tax agents.
• Consideration should be given to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
• MTD for Income Tax should not apply to landlords until these major points have been dealt with by both HMRC and software providers.
  • Time will be needed to test new systems before adoption.

Non-UK residents

• The policy of tenants withholding tax under the Non-resident Landlord Scheme should be reviewed.
  • No respondents were aware of any instances where residential tenants withheld tax.
  • The general view was that the obligation was not widely understood
• If tenant withholding is retained, consideration should be given to:
  • Raising the threshold.
  • Making the withholding obligation clearer in guidance.
  • Finding ways to raise awareness.
  • Clarifying the process to rectify matters if tenants initially do not withhold.

Other recommendations

Other recommendations included:

• Adopting a simplified approach that property letting income can in no circumstances make taxpayers eligible for Class 2 National Insurance contributions.
• Clarifying the interaction between the Property allowance and the Finance cost reduction.
• Considering whether the rules for restricting interest relief when the Cash basis is used add unnecessary complexity.
• Adopting a consistent interpretation (where possible) of the word ‘business’ in relation to property across all tax statutes. Where there are different meanings, different words in statutes should be used.
• Improving existing guidance in relation to mortgaging and Re-mortgaging so that it is clearer and more consistent.
• Clarifying whether Rent-a-room Relief applies if the taxpayer is temporarily away from home.
• HM Treasury and HMRC working with the Department for Environment, Food & Rural Affairs (Defra) to explore the potential for a ‘Rural Business Unit’ or similar regime for tax, with a view to simplifying obligations and complex rules for diverse rural businesses.

Useful guides on this topic

A landlord? Start here...
This freeview 'At a glance' guide is essential reading for landlords: our guides take you step-by-step through planning your business for tax purposes and complying with your different tax obligations during the life of your rental business.

Adviser's Guide: Property Business, profits and losses
What is property income? How is it taxed? How are profits calculated? How are losses relieved? Is NI paid on property income? Is property income classed as a business activity?

Property profits & losses: Toolkit (2022-23)
Our Property profits & losses toolkit takes HMRC's version and adds a great deal more information about what you can claim as an individual.

Is it a trade, a business, or an investment activity?
Starting in business? Is your new or existing business a trade, a business or an investment activity? The distinction is very important for tax purposes. This guide summarises key issues for tax purposes.

Joint property elections
When property is held in joint names it is taxed according to beneficial ownership. There is an exception where married couples and civil partnerships hold joint property.

External link

OTS: Property income review: simplifying income tax for residential landlords