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Will The Taxation Of Residential Property Income Be Simplified?

In what is most probably the last report to be issued by the Office of Tax Simplification (OTS), we hope that the Treasury will take on board some of the recommendations on the Income Tax rules for residential property income.

The taxation of property income is over complicated by distinguishing between standard rentals and short term holiday rentals. Different income tax treatment applies to each, and holiday rentals can attract additional reliefs for Capital Gains Tax (CGT). You also have to distinguish between property in the European Economic Area (EEA) and other overseas countries.

The OTS have suggested there is no need to have different tax regimes and all property income should be treated in the same manner, acknowledging that there may be a requirement to determine if a property business is of such a scale as to be treated as a trading business. A significant number of landlords believe they are carrying on a business, not understanding the implications of property income for tax purposes.

Another area of confusion is the tax treatment of repairs and improvements to property. The question of whether it is an allowable deduction for income tax or a capital expense which will reduce CGT payable on a future disposal is a longstanding dilemma for many taxpayers. The OTS suggest only further guidance and examples from HMRC can help.

Where property is owned jointly there are differences in treatment where the joint owners are spouses and where the property is a furnished holiday let (FHL). The apportionment of taxable income can often be varied from the underlying beneficial ownership of the property. Sensibly, the OTS suggest that the taxable income should be split in the same proportion as beneficial ownership in all cases. This would prevent the mandating of a 50:50 split between spouses and the need for complicated form 17.

Finally, the report mentions the difficulties landlords will have in complying with Making Tax Digital (MTD) when introduced in April 2024 and hopes HMRC (and software providers) will have sufficient resources to manage this, particularly for jointly owned property. MTD is a topic worthy of an article on its own and tax simplification is now a topic for the Treasury to manage on its own, without the influence of the OTS.

To discuss your own circumstances, please contact a member of our Residential Property team or email [email protected].

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