I have received quite a number of emails and phone enquiries in recent weeks, because of the impending introduction of MTD (Making Tax Digital) for landlords. HMRC are in the process of making changes to the rules governing individuals who receive income from renting out a property.
So, today I will attempt to answer these questions and others, from information recently provided by HMRC via a series of online webinars conducted online for accountants.
MTD ITSA: When landlords must register for Making Tax Digital
All taxpayers are required to complete a Self-Assessment tax return (ITSA), if they have income from property and or self-employment (SE) of £10,000 or more (Note: The £10k threshold is per taxpayer not per property). Once a taxpayer has included income from property income on his/her tax return, in the following tax year they must use the MTD system thereafter.
Example 1: Paul and Sandra are married and jointly own a property which is let out for £12,000 (gross) per year from April 2020. The income is deemed to be allocated to them on a 50:50 basis because they are married, but they do not inform HMRC as their income from property/SE is deemed to be £6,000 per year each, which is below the turnover threshold of £10,000 before a submission is required for HMRC, and they, therefore, they do not need to register for MTD ITSA.
Paul unexpectedly dies on 1st June 2022, so Sandra receives the entire rental income from that date onwards. On her ITSA, Sandra reports gross property income of £10,500 on her 2022/23 tax return which she submits in January 2024. Sandra will have to comply with MTD ITSA from 6 April 2024, her first MTD ITSA filing date will be 5th July 2024.
Note: The deemed 50:50 split in income can be changed if for example Paul’s 50% share combined with his income from PAYE, would move him into the 40% tax bracket, whilst even if Sandra received all of the rental income, she still wouldn’t move into the 40% band. This is done by submitting an alternative declaration to HMRC on Income Tax form 17.
MTD ITSA: What happens if you’re not married?
When a property is jointly owned by individuals who are living together but not married or in a civil partnership, they are allowed to allocate the property income between them as they see fit, and this allocation can vary year to year; with this rule applying even where the jointly owned property is not treated as a partnership.
Example 2: Eileen, Laura and Charlotte are sisters who jointly own a property that is let for £18,000 per year. If the sisters share the property income equally, they each receive gross rents of £6,000 per year, which is under the £10,000 turnover threshold, so they are not required to comply with MTD ITSA. In 2023/24 the sisters decide that Charlotte should take £12,000 of the rental income and Eileen and Laura £3,000 each. Charlotte will report gross property income of £12,000 on her 2023/24 tax return which she submits in September 2024. Charlotte must then comply with MTD ITSA from 6th April 2025, but her sisters Eileen and Laura are not required to make any declarations.
MTD ITSA: When a taxpayer has both partnership profits and property income
The turnover threshold is calculated per person for property income, but per business for self-employed income. Thus, a partnership with gross turnover of £10,000 or more must comply with MTD ITSA and make the appropriate submissions, and not the individual partners. The partnership income of the individual partner is not “qualifying income” for MTD.
Example 3: Beth and Rory run a seaside candy floss stall as a partnership. As the summer season is very short their annual turnover from this trade is only £9,000, which is allocated equally between the partners. As the partnership’s gross turnover is below the £10,000 threshold the Beth and Rory partnership does not have to register for MTD ITSA.
Beth and Rory also let a property and receive gross rents of £7,500 each. Although Beth and Rory have total income from self-employed trading and property of £12,000 per year each, they do not have to comply with MTD ITSA. This is because, somewhat bizarrely, under current HMRC rules their partnership income is not treated as part of their income for the MTD turnover test.
MTD ITSA: What about non-resident landlords?
Non-resident landlords whose gross income from UK property exceeds £10,000 per year are required to sign up for MTD ITSA. Letting agents already have to submit quarterly reports and pay tax quarterly on behalf of these landlords who are within the non-resident landlord (NRL) scheme.
When HMRC were asked if letting agents will have to submit quarterly reports under the NRL scheme as well as quarterly MTD submissions on behalf of the landlord, they answered with their stock response of: “HMRC will set out details on how the non-resident landlord scheme will operate in due course.”
MTD ITSA: Tax Accountant’s view
As usual, when faced with a question they hadn’t thought, such as, ‘why will a business partnership be treated differently to a civil partnership’, HMRC hasn’t got an answer. This is yet another change to the rules governing who should complete a tax return and under what circumstances, brought about because of HMRC’s obsession with the sacred cow of ‘MTD’.
So Mr Taxman, when you read this week’s Blog (as I know you do), it may disappoint you to learn that despite a plethora of press releases, your message does not appear to have reached your real target audience, the taxpayer.
It might also interest you to know that a significant minority of the questions I’ve been asked recently (ditto with my fellow accountants up and down the country) can be summed up under the loose heading: “What on earth is MTD?
I rest my case!