Making Tax Digital (MTD), the Government’s initiative to digitise tax and record keeping, is extending to Income Tax from April 2024.
For many, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will be the first time that they have had to comply with MTD rules and digital record keeping, and it’s important that you know what you need to do to comply with the changes.
In this guide, we set out what landlords need to know, and what they can do now to prepare for the changes.
MTD ITSA
MTD ITSA will impact those who run their own business or let out property.
This is a huge change, affecting around 4.2m taxpayers with business and/or property income over £10,000, including landlords, sole traders and partnerships
Of the 4.2m taxpayers affected by the change, it is estimated that around 1m are landlords.
What do landlords need to know?
In our Making Tax Digital for Income Tax Self Assessment (MTD ITSA) FAQs, we set out what everyone affected by the changes needs to do to comply, including using HMRC-recognised software to keep accounting records digitally, and to submit updates of income and expenses to HMRC during the year.
If you run a business, it may be easier to identify what the £10,000 threshold covers. But for landlords with different income streams, and multiple properties, it can be a little bit harder to figure out.
How the £10,000 threshold applies to landlords
The threshold of £10,000 applies to your personal income as a whole, not per property. It also includes any other income you receive from any self employment or sole trader business you operate. It does not apply to income received from employment, or other tax types like interest, dividends, or capital gains, for example.
Whilst landlords may not consider deposits as rental income, if you keep any tenancy deposit for repairs, as the current rules state, HMRC will consider this as income and it will count towards the £10,000 threshold.
The term landlord encompasses many different setups. Here we outline some scenarios and how each is impacted by the changes.
Landlords who are employed
Even if you do not run a business, MTD ITSA still applies to you if your annual rental income is above the £10,000 threshold.
You may be employed full time, with your rental income not being your main source of income, and pay income tax via PAYE. However, HMRC still considers you to be running a business, so the rules do apply and you will need to register for MTD ITSA.
‘Accidental landlords’ who inherited properties
Sometimes life events unravel in a way that means a property is passed down from one generation to another. Commonly people in this scenario will rent out the property, either for a short term until deciding what to do with the property, or in the long term as a source of income.
These so-called ‘accidental landlords’ may not have deliberately pursued a path in property, but this rental income needs to be declared and counts towards the £10,000 threshold for MTD.
Renting out a room in your own house
As the cost of living starts to hit, renting out a spare room can be a great way to bring in some extra cash to help ease household expenses.
The ‘Rent a Room Scheme’ allows for up to £7,500 per year of tax-free income – but over this limit and it needs to be declared. If you’re renting out any part of your home for more than £625 per month, you’ll be impacted by MTD.
Buy-to-let landlords
MTD ITSA applies to all buy-to-let landlords, if their annual rental income is above the £10,000 threshold.
If you own the property with someone else, a parner, spouse or other family member, it’s important that you are clear on the rental income you personally receive, as this is how your tax will be calculated. You should only be taxed on the rental income you personally receive, rather than the total rental income from the property (or properties).
If you use a letting agent or property manager
While using a letting agent or property manager moves a lot of the day-to-day admin of a rental property away from the landlord, the income is still the responsibility of the landlord to report to HMRC. Your property may be quite ‘hands off’ but the rules around MTD apply equally for those with agents and those without.
Foreign properties
MTD ITSA applies to UK and non-UK property, so if you own a property overseas and receive rental income over the £10,000 threshold, this does fall within the scope.
Depending on where your property is, you may be able to claim double tax relief, in the same way as the current Self Assessment scheme.
Furnished holiday lettings (FHLs)
A FHL is a short-term rental property, such as a property on Airbnb.
FLHs are classed as a ‘trade’ by HMRC. There are some tax advantages for FHLs, but the properties need to meet certain conditions:
- The property must be available for commercial holiday letting to guests and holiday makers for at least 210 days (30 weeks) per year.
- If the FHL is rented out by the same person for more than 31 days for ‘long term’ occupation, their stay shouldn’t exceed 155 days (+22 weeks).
- The property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. This does not include family staying at the rental property.
As the name suggests, FHLs must be furnished adequately in order to qualify. There are no specific requirements, but the property should be fit for self-catering use.
FHLs fall into two categories for tax purposes – FHLs in the UK, and FHLs in the EEA. Income from either category counts towards the £10,000 threshold.
If you own a FHL, you will need to comply with MTD ITSA.
Commercial properties
If a commercial property is owned by an individual, or group of individuals, it will fall within the scope of MTD ITSA.
If a commercial property is owned by a company or a pension, the MTD ITSA rules will not apply.
Properties owned by an incorporated company
If a property is owned by an incorporated company, and you are paid a salary from this company, it is unlikely that MTD ITSA will apply.
As the property is owned by an incorporated company, corporation tax will apply.
Income from shares in a real estate investment trust (REIT)
MTD ITSA only applies to rental income from property ownership, so if you receive income from shares in REIT, this income will not be subject to MTD ITSA rules.
MTD VAT
Even if you are already registered for MTD VAT, if you receive rental income over £10,000 you must register for MTD ITSA separately.
As MTD VAT and MTD ITSA relate to different areas of tax, the submissions will be different and are independent of each other.
Getting started with MTD ITSA
As we mentioned in our Making Tax Digital for Income Tax Self Assessment (MTD ITSA) FAQs, it may be a big adjustment, but there are benefits to MTD ITSA.
Businesses already complying with MTD rules have reported that they find preparing and submitting returns easier, and that MTD has increased their confidence in managing tax affairs and using technology.
Even though the changes are not coming until April 2024, it’s a good idea to get started now by making sure you understand how the existing process will change when it’s digitised and that you understand digital record keeping.
You’ll also need to select a HMRC-recognised, MTD compatible software, like Clear Books.
Clear Books’ MTD insights
Head to our MTD hub for all our latest MTD news, product updates and insights – and register for our updates to make sure you’re the first to know of any changes.
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