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Landlords warned tax change could have surprising impact

The government’s much-hyped ‘tax day’ yesterday had - by comment consent - an underwhelming impact on the property sector.

However, one tax expert is warning landlords may be surprised at the change buried in the government’s announcements relating to the Making Tax Digital programme.

“Of particular note is the confirmation that Making Tax Digital for income tax is set to go ahead in April 2023, as it will fundamentally change how those receiving rental or self-employed income, for example, file their tax returns” explains Katharine Arthur, tax expert at accountancy practice haysmacintyre.

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“This in turn ties in with the proposed changes to timely payments, which could see those who pay through tax returns reporting quarterly or even monthly, as opposed in two instalments a year.”

She continues: “These changes could result in a significant overhaul of the tax system as we know it, and although it could see both the self-employed and landlords facing a hefty administrative task as they get to grips with the new reporting methods, it will ultimately help to streamline and modernise the current system.”

The MTD strategy, which has stalled in recent years, was put back into top gear by yesterday’s announcements - but bigger changes, predicted for the likes of Capital Gains Tax and Stamp Duty Land Tax failed to materialise.

However, there was one explicit pledge to tighten taxation in one area affecting property investors - holiday lets. Currently the holiday let tax status is, as most people know, more favourable to investors than buy to let.

This is because HMRC classes a ‘furnished holiday let’ as a business, with consequently lower taxes. Owners must meet certain criteria, chiefly that the home is available to let for 201 days a year and is actually let for at least 105 days, with no single letting exceeding 31 days; and, of course, the property must be fully furnished. 

These rules are highly specific but sticking to them is worthwhile in order to be classed as a business. This would mean paying business rates instead of the usually-higher council tax, while holiday home owners can offset many operating costs against tax, and when it comes to selling the Capital Gains Tax liability is lower than on a buy to let investment. 

However, the government appears to have this lettings option as a target.

 

Yesterday’s announcement on long-term tax reform included the statement: “The government will legislate to change the criteria determining whether a holiday let is valued for business rates to account for actual days the property was rented, following a previous consultation. This will ensure that owners of properties cannot reduce their tax liability by declaring that a property is available for let while making little or no actual effort to do so.”

It continues: “Further details of the change and implementation will be included in the Ministry for Housing, Communities and Local Government’s response to the consultation on the business rates treatment of self-catering accommodation which will be published shortly.”

Otherwise, yesterday’s tax announcements had little new or challenging for agents - to the surprise of many.

You can see a full summary here.

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    Repairs tend to be lumpy in cost so annual tax returns make more sense for landlords than more frequent reporting.

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    I've just had a run on repairs, boilers, a roof and all these electrical tests, if I put a short term tax return in the tax man would be paying me.

     
  • Matthew Payne

    A lot of the commentary I have seen seems to be almost disappointed/annoyed there wasn't tax hikes. HMG damned if it does, damned if it doesn't. Welcome news I thought yesterday irrespective of what may be in store in 2 years time. And as we have seen recently, a lot can happen in 2 years that might mean those things may not materialise....

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