The Office of Tax Simplification (OTS) has published a report detailing the complications landlords face with income tax on residential property.

Among the challenges highlighted by the OTS was the rollout of Making Tax Digital for income tax self-assessment (MTD for ITSA), the different tax schemes for furnished holiday lettings, and the boundary between capital and revenue costs.

The OTS questioned the need for separate tax guidelines for furnished holiday lettings, which "provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced capital gains tax bill on disposal."

The OTS also suggested that the Government should consider refining guidance on the boundary between the tax breaks for improvements and repairs for furnished holiday lettings.

MTD for ITSAAs of 2024, landlords will be expected to start filing their self-assessment tax returns via MTD-compatible software, provided they are a sole trader and don't run their lettings through a company.

However, the report recommends that the Government doesn't apply MTD to landlords until a number of measures have been taken.

First, the OTS stated that jointly owned properties should have their own established tax system when filing their returns digitally.

Currently, It is currently normal for only one person to file a return, much like a partnership. To resolve this, the report says HMRC should consider creating a joint-property-and-MTDfiling entity.

The OTS also suggested that the MTD threshold for landlords be increased beyond £10,000 per annum, at least for the medium term, because "The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any".

"The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement," it added.

Non-UK landlords

Another key point raised in the report was the rules of taxation on tenants when renting from a non-UK landlord.

Unless a non-UK resident landlord registers to file and pay with HMRC, the non-resident landlord scheme requires the deduction of tax at source from rents paid to them - this obligation falls on letting agents or, if there are none, on tenants.

However, none of the respondents questioned by the OTS were aware of this rule, and it is seen as widely misunderstood, prompting the OTS to suggest the Government "find ways awareness, and clarify the process to rectify matters if tenants initially do not withhold".

Leigh Sayliss, vice-chair of the Chartered Institute of Taxation, agreed with the OTS's report and believes more should be done to simplify the tax rules surrounding let property.

She said:

"The report offers several ways in which to improve this area of the tax system.

"However, the current focus of the Government is, understandably, on maximising revenue, tackling avoidance and recovering monies incorrectly claimed under the various COVID schemes.

"We are, therefore, concerned about how many resources HMRC will be able to put into implementing any changes at this time."

"If HMRC is not able to act on the report immediately, we still hope that the important messages it contains are picked up when the economic climate improves."

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