Have you heard that Self Assessment might be coming to an end?
And that the need for you to file an annual tax return might be on its way out?
Well, back in 2015, the then-Chancellor announced the death of the tax return. This would be achieved, he added, by the digitalisation of taxes.
It would mean the end of the Self Assessment tax return, used by many landlords to declare rental income among other things.
It’s taken a little longer than anticipated but this is now happening.
The Making Tax Digital (MTD) revolution will soon encompass non-incorporated landlords (those who own and rent out properties as individuals, rather than as limited companies).
This will be via the Making Tax Digital for Income Tax (also known as MTD for Income Tax, MTD for Income Tax Self Assessment and MTD for ITSA) system.
But it will only affect those with property income over £10,000 (along with sole traders and general partnerships also, but that’s outside the scope of this article).
It all begins as of 6 April 2024.
Let’s take a look at what landlords need to know. Here’s what we cover:
How Self Assessment works now
Landlords take all shapes and sizes.
Some run property businesses as their sole occupation, while others may have purchased one or more buy-to-let properties as a sideline to their main income.
Some may have inherited a property that they let out, or perhaps even live in a property while renting out another part of it.
Those who don’t own and run the property (or a property portfolio) through a limited company typically must use a yearly Self Assessment tax return to declare their property income.
Because this is a form of income, it’s no surprise that income tax applies.
Using Self Assessment means they can work out how much tax and National Insurance is due.
How much they pay will therefore depend on their personal circumstances.
For example, they may be taxed on this income at a higher rate because of their day job, where their salary is paid by their employer through PAYE.
The great news is that the first £1,000 from property income (called the property allowance) is tax-free. If you receive between £1,000 and £2,500 from property, you might not need to use Self Assessment either and should contact HMRC for more information.
However, you must use Self Assessment if the income is:
- £2,500 to £9,999 after allowable expenses.
- £10,000 or more before allowable expenses.
What are allowable expenses?
Well, we’re glad you asked.
Buying, renovating or improving properties isn’t included, unfortunately.
However, wear and tear repairs between tenants can probably be claimed, as can repairs or maintenance that returns the property back to an original condition before the damage (e.g. replacing roof tiles that blew off, or replacing a boiler).
But the rules around what counts as repairs and maintenance, and what’s considered as actually improving a property, are complicated.
You should check the rules before making a claim.
For example, it’s OK to replace a damaged single-paned window with double-glazing even though that arguably improves the building.
Other allowable expenses include things you expend money for in the day-to-day running of the property, such as:
- Relief on interest on the mortgage for a buy-to-let residential property
- Fees, such as letting agents, accountants and legal fees (for lets of a year or less, or renewing a lease for less than 50 years)
- Insurance (buildings and contents)
- Bills such as gas, water and electricity, and Council Tax
- Ground rent and service charges
- Professional property services you employ such as a gardener or cleaner
- Other costs relating to running a business, such as stationery or advertising.
How things will change with Making Tax Digital for Income Tax
MTD for Income Tax doesn’t change how tax works for landlords, so much of what’s already been described remains true.
It brings new requirements for how landlords do their accounting relating to property income, and as such can make things much simpler and give you a much clearer insight into your property business finances.
First things first: a key point is that MTD for Income Tax marks the end of the Self Assessment tax return if income from the property is over £10,000.
These individuals will be required to use MTD for Income Tax instead when it begins as of April 2024.
Those receiving £10,000 or less will continue to use Self Assessment.
What is MTD for Income Tax?
There are two halves to this answer, as follows:
- You must use software for your accounting relating to property income, and keep the accounting records digitally.
- You must provide periodic updates to HMRC across the year, along with a final statement about your earnings.
Using software could mean using a spreadsheet, but this will require bridging software to be able to communicate with HMRC.
Many landlords will use MTD-ready accounting software, which will free up an enormous amount of time otherwise spent on admin by taking care of the details.
And what are those details?
Here’s where we get to the second point above.
MTD for Income Tax requires you to provide the following for all your property income (in other words, you don’t need to do the following for each individual property if you have a portfolio):
- Periodic updates about your total property income to HMRC. This should be least quarterly (that is, every three months), and must be submitted via software.
- An End of Period Statement (EOPS) for property income. This must be submitted via software no later than 31 January following the end of the tax year. It summarises the income, allowances and adjustments for your property income.
- A final declaration, submitted via software no later than 31 January following the end of the tax year. Unlike the periodic updates and the EOPS, the final declaration refers to your total income from property income and also any self-employment that falls within the scope of MTD for Income Tax. Similar to the Self Assessment tax return, the final declaration is how you calculate your income tax and National Insurance contributions for the tax year just ended.
You’ll continue to pay your tax and National Insurance in the same way as with Self Assessment, and the bill should not be any different had you done it via the Self Assessment system (assuming your accounting is correct).
Am I a professional landlord?
As mentioned above, MTD for Income Tax affects any unincorporated landlord with rental income over £10,000.
HMRC considers these people to be running a business.
This remains true even if it might not feel like you’re running a business.
For example, somebody who rents out an inherited property and expends the equivalent of just a few days of work a year attending to the property and its tenants is still considered to be running a business.
Similarly, those renting out part of the home might also be affected.
Put simply, if rental income you receive is over £10,000, you’ll need to follow the rules of MTD for Income Tax.
An important note needs to be made about unincorporated professional landlords, who have additional tax obligations. HMRC defines professional landlords in the following way. All of these points must apply to the individual:
- Being a landlord is their main job
- They rent out more than one property
- They’re buying new properties to rent out.
In addition to potentially following MTD for Income Tax rules, these people need to pay Class 2 National Insurance contributions if their profits are above £6,515 a year.
The definition of a professional landlord predates the introduction of MTD for Income Tax, but is carried over when the new rules come into effect.
Furthermore, those who rent out part of a property that’s their only or main home are known as resident landlords.
Again, these individuals might need to follow the MTD for Income Tax rules if the rental income is over £10,000, just as they need to use Self Assessment currently once their property income gets above £7,500 (assuming they’re registered under the Rent a Room scheme).
What if I’m a sole trader and a landlord?
If you’re a sole trader, running one or more businesses and using Self Assessment, then MTD for Income Tax could apply to your income.
If you’re both a sole trader and a landlord, then your total income from all sources is taken into account when working out if MTD for Income Tax applies to you.
For example, if your income is £40,000 a year as a plumber and £8,000 from property rental, then MTD for Income Tax will apply to both your income as a plumber and your property income—even though the property income taken on its own isn’t over £10,000.
If you earn £3,000 as a sole trader and £8,000 from property rental then, again, MTD for Income Tax will apply to both your income as a sole trader and property because £3,000 + £8,000 = £11,000, which is more than the £10,000 threshold.
You’ll have to make separate periodic updates and EOPS for the property income, and for any sole trader business(es) you own.
For example, if you work as a sole trader plumber and also as an electrician, and receive property income, you’ll need to make 3 x periodic updates (12 in total), 3 x EOPS, and a single final declaration listing all your income and expenditure.
Why Making Tax Digital can make life easier for landlords
Landlords must keep certain kinds of records, such as details of rent received, plus invoices, bank statements, and more.
But Self Assessment makes no demands on how they keep their accounting—of even if they need to bother doing so.
This changes with MTD for Income Tax.
And that’s a good thing.
The use of modern accounting software provides incredible insight into business finances.
You’ll also have a far better idea of how much tax you owe at any given moment too.
Many of the additional processes required for MTD for Income Tax will be automated, provided you use good-quality accounting software.
In other words, the periodic updates you must submit at least quarterly will not be a hassle. It’ll simply be a matter of clicking or tapping a button to prepare the report, then checking it briefly, before sending it off.
You should know that there’s no legal requirement for the periodic updates to even be accurate—although it’s best if they are.
For the EOPS and final declaration, you’ll again click a button to prepare a report, then check the details to ensure everything is correct (and possibly apply adjustments), before submitting.
There will be no hassle trying to get all the information together, provided you’ve made good use of your accounting software.
If you use an accountant, they can help with the periodic updates, EOPS and final declaration, just as they help with the Self Assessment tax return.
Self Assessment vs MTD for Income Tax – what’s required?
Outside of submitting the yearly Self Assessment tax return, using Self Assessment as a landlord doesn’t present too many requirements.
But to be compliant as a landlord with MTD for Income Tax, you’ll need to use software for your accounting as it relates to property income.
It’s right there in the title: tax is being made digital.
At its most simple, digitalising your property accounting could be a spreadsheet plus a plugin known as bridging software.
You record income and expenditure details in the spreadsheet, and then tell the bridging software what the key cells are that it needs to use to prepare things such as periodic updates, the EOPS, and the final declaration.
However, this is probably the most problematic way of being ready for MTD.
It’s so easy to accidentally overtype a cell in a spreadsheet, for example.
But the main worry to consider is the rules around digital linking.
MTD rules say the movement of data from one destination to another must be both digital and automated. Manually copying and pasting from one place to another is prohibited most of the time—as incredible as that might sound.
If HMRC finds out, you could be penalised.
The solution is to use modern, MTD-ready accounting software.
This encourages basic accounting practices, such as using the software to submit invoices and record payments, creating and submitting your final declaration, EOPS and final declaration will be simple. The data will already be in the system, and up to date.
And because it’s MTD-ready, the software will automatically know and help you apply the requirements of MTD for Income Tax.
Put simply, the software vendor will have sweated the details for you, making life so much easier.
What landlords can do now to prepare for 2024
To get ready for Making Tax Digital, you need to start using accounting software and keeping digital records.
If you’re not doing so already, you should be looking to switch to using some kind of software for your accounting.
Do so as soon as possible; don’t leave it until the last moment.
After all, in April 2024, a lot of people will be contacting HMRC with problems trying to adapt to MTD—and if you’re already using software, you’ll be in a far better position.
You definitely can no longer keep a paper-based ledger in any form as your only form of accounting records—whether that’s using an actual ledger book, or scribbled notes in a jotter.
Many landlords already rely upon accounting software. They can issue invoices with ease, reconcile their bank statement against their outgoings, and more.
The software also grows with them, should they increase their property portfolio.
Tracking income and expenditure for several properties can become complex—but much less so if you’re using good accounting software.
Above all, however, accounting software means your accounting is always kept in a legally compliant digital way—and for the required period (usually five years).
You just don’t have to worry.
The other tip is to start snapping receipts for expenditures, such as property repairs.
As they say, there’s an app for that.
AutoEntry lets you use your phone or a PC and scanner to grab an image of the receipt. The information is then automatically extracted and can be sent straight to your accounting software.
For example, if you buy something in a shop for your property and are handed a paper receipt, you can take a snap of it using your phone. The information such as the retailer details, amount, date, VAT amount, and so on, will be extracted automatically.
Similarly, if a plumber working on your property hands you a paper invoice, you can scan it and the data will be automatically understood.
Where to get support with the tax return changes
It’s a good idea to get help when considering how your accounting will change once Making Tax Digital for Income Tax arrives.
Luckily, this kind of help is available on every high street in the form of accountants and tax advisers.
Seek out one that specialises in property income and, in return, you get people with amazing experience of every aspect of tax and running a property business.
They will certainly be able to advise on how you can both start the MTD ball rolling, and then ensure you’re ready in time for the April 2024 deadline.
But care needs to be taken.
You can hand off a lot of the workload around MTD to your accountant once MTD for Income Tax is up and running. But you still need to use software to keep your accounting, and you need to keep your accounting records digitally.
In other words, you can’t just ask your accountant to take care of all of it for you and then forget about it.
Your accountant will be able to advise the best way forward, and how best you can work with them.
Contact your software vendor too. They will have a massive amount of experience with both tax and, unsurprisingly, accounting software.
As MTD for Income Tax approaches, many will offer dedicated support where you can learn if the software you use is MTD-ready—and what you’ll have to do to make use of the MTD features.
Many will also walk you through what MTD means for you, too.
Finally, consider approaching professional landlord associations to see what their advice is.
There’s little doubt that applying the rules of MTD to a property business isn’t like applying it to a sole trader business, and inside information could prove extremely useful.
Final thoughts on the end of Self Assessment
Many landlords are sure to find the arrival of Making Tax Digital for Income Tax a surprise. For small-scale landlords, it might mean they have to start taking accounting more seriously than they might have done so previously.
But it’s important to focus on the positives, which includes a much better understanding of your property business finances, and a reduced requirement for onerous administrative tasks.
A guide to Making Tax Digital for Income Tax
Need help to get your business ready for Making Tax Digital? Download this free guide to learn about MTD for Income Tax and get prepared now for changes that start from April 2024.