Office of Tax Simplification to review property tax regime

The Office of Tax Simplification (OTS) is seeking views on how property tax can be streamlined for private landlords and investors, it has been announced.

The department – which gives independent advice to the Government on simplifying the UK tax system – said the review will focus on “opportunities for simplification of the tax and administrative treatment of individuals, partnerships or micro companies deriving income from residential property”.

It comes after research suggested that the current tax regime was needlessly complex, increasing the potential for errors when putting together a tax return.

Under the current system, income from residential property owned by individuals is taxed under one of two different regimes. While income tax is due on profits from renting out property at general income tax rates (after certain allowable deductions, such as general maintenance costs and letting fees), residential property mortgage interest relief is restricted to the basic rate of income tax.

Likewise, there are different taxation rules under the Furnished Holiday Lettings (FHLs) regime, which applies to residential property let on short term lets within certain parameters, and another set of rules for the Rent a Room Scheme.

Commenting on the review, the OTS said the consultation will “consider the current regimes for the taxation of residential property held by individuals, partnerships and micro-companies, and develop recommendations for simplification and ways of addressing distortions”.

In particular, the review will consider:

• the way that the taxation of property income fits into the overall scheme of income tax, and the rationale for the similarities and differences between the treatment of property and trading income, and income from other investments, and related rules in other taxes
• the differences between the rules for residential lettings generally and those applying to Furnished Holiday Lettings, the incorporation of property businesses, including SDLT aspects
• 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, and whether the way they operate meets policy intent
• income received from property in the UK, including by individuals living abroad
• income from property overseas, including the complexities of the definition of qualifying EEA property in relation to Furnished Holiday Lettings
• any difficulties arising in understanding the rules, or in the tax processes involved in becoming or ceasing to be a landlord
• the impact of the use of intermediaries by those letting property, and any potential for them to assist in easing administrative burdens.

According to the latest statistics, around 2.9 million individuals and 32,000 partnerships with property businesses filed a tax return in the 2018/19 tax year – the latest data available.

The scoping document can be found here.

For help and advice with related matters, please get in touch with our team today.