The review of property income by the OTS

The OTS has published its review of UK taxation of income from residential property. What could it mean for private landlords?

What could this review mean for private landlords?

According to the data provided by HMRC in 2019/20, almost 25 percent of tax returns submitted by individuals have an element of property income. The Office of Tax Simplification (OTS) undertook a review of property income earlier this year. It has now published its recommendations for possible action including: abolish or reform the Furnished Holiday Let regime and align  definitions of 'trade' and 'business' for property businesses; set up a new tax scheme for diversified agricultural businesses; reform the rules for allowable expenses; reform income reporting for joint owners of residential property; delay Making Tax Digital for landlords until fundamental problems are resolved; and reform the Non-Resident Landlord Scheme, particularly the requirement on tenants to withhold tax.

These are only recommendations (and it should be borne in mind that the Government does intend to wind up the OTS in due course); what course of action the Government chooses to take remains to be seen. However, with HMRC once again spotlighting property through various initiatives themselves, as mentioned in a previous LinkedIn blog post in September 2022 by Mariam Moi, Senior Manager, Family Office and Private Client, KPMG in the UK, notice should be taken of the direction of travel these recommendations indicate. 

Below we consider some of the more significant recommendations further:

  • Perhaps the most significant recommendation of the OTS is in relation to the Furnished Holiday Lettings regime. The OTS recommends the abolition of this regime and says that instead the Government should consider a statutory ‘bright line’ test to define when a property business should be handled under the trading rules. This would align the definitions for Inheritance Tax, Capital Gains Tax and National Insurance to the Income Tax status of a business being carried on;
  • The definition of a ‘business’ is used variously across the tax statutes in relation to property, creating confusion for taxpayers. The OTS has recommended that HMRC guidance adopts a consistent interpretation where possible of the word ‘business’ in relation to property across the tax statutes;
  • The recommendation of a ‘bright line’ test to define property business, as well as the alignment of the definition of ‘business’ across tax, could have significant and wider impacts. For example, being a ‘business’ for the purposes of relief from Capital Gains Tax when incorporating can include a property investment business, whereas for Inheritance Tax, property investment businesses would not fall within the definition of a ‘trading business’ for relief purposes. Changes to the definitions relating to property businesses could therefore have any number of fall outs which would need to be carefully considered and fed back to HMRC;
  • The report acknowledges that 66 percent of agriculture-based businesses now have some diversification e.g. holiday lets and renewable energy generation. The OTS recommends that such businesses are allowed to treat these for tax purposes as a ‘rural business unit’ so that all these activities are treated as a single business. This could provide a number of benefits including the ability to use losses across these income streams and ease administrative burdens; and
  • HMRC data indicates that almost half of all taxpayers renting out property do so jointly. As it stands, income can be split on several bases. The OTS has recommended that the Government may wish to remove this ‘complexity’ such that the only split of income/gains is matched to beneficial ownership. This could have a material impact on any joint owners currently choosing a split which is not according to beneficial ownership.

Historically the Government has been slow to take up OTS recommendations but nevertheless these reports do inform policy debate.