Landlords beware: the OTS property income review has narrow scope and wide impact

An overview of the key messages in KPMG in the UK’s response to the OTS call for evidence on its review of property income.

An overview of the key messages in KPMG in the UK’s response to the OTS call for evidence

Earlier this year the Office of Tax Simplification (OTS) published a scoping document and call for evidence on its review of property income. The scope of the review is limited to “the taxation of residential property held by individuals, partnerships and micro-companies”; however, the regime for landlords with two properties and those with 200 properties is the same. All landlords should therefore be aware of the review and the resulting potential for change to the taxation of property income. It will also be important for the OTS to consider all those who receive property income when making recommendations, even if they do not fit within the stated scope. In this article we summarise KPMG in the UK’s response to the call for evidence.

Scope of the review

The primary focus of the review is to identify opportunities for simplification of the tax and administrative treatment of individuals, partnerships and micro companies deriving income from residential property. The review will consider the current regimes for the taxation of residential property, including Capital Gains Tax (CGT) aspects, and develop recommendations for simplification and ways of addressing distortions.

The consultation period has now closed.

KPMG in the UK’s response

The headline message in our response was as follows:

Some of KPMG’s clients are large businesses with a large number of rented properties and there is a concern that recommendations made in this review could lead to unintended complexities for these businesses if they are not actively considered during the consultation process.”

Our other key messages were:

  • Reasons for landlords to incorporate their businesses

The main motivations for taxpayers to incorporate a property business are for improved governance or access to finance. Businesses should be able to make commercial decisions to enter into or out of a particular business structure without tax barriers. It is difficult to understand why there are tax charges simply to change the structure of a business and it would be easier for taxpayers to make the best decision for themselves and the economy if tax were not a factor in these decisions.

  • Changes to property ownership

There are tax barriers to a change of property ownership and this inflexibility can lead to complication. This is evidenced by the potential Stamp Duty Land Tax (SDLT) charge that can arise, even when a property is transferred between spouses/civil partners, where the property is mortgaged.

  • Property rules for partnerships

The property rules for partnerships are very complicated; particularly when the partnership profit-sharing ratio is not straightforward. This applies to Income Tax, CGT and SDLT. In our experience, taxpayers who are in partnership would prefer to make decisions about their business structure and profit-sharing ratios without tax being a major driver of the decision.

We await the outcome of the consultation and the recommendations put forward by the OTS to simplify the taxation of property income.