Making Tax Digital for Landlords
The examples below may help provide some insight for landlords as to whether they will be caught under the forthcoming Making Tax Digital changes
When must landlords register for with MTD ITSA?
Taxpayers are mandated into MTD ITSA from the beginning of the tax year after they submit an income tax return that shows they have qualifying income from property and/ or self-employment of £10,000 or more. This turnover threshold is calculated per taxpayer not per property, but partnerships are different.
Example 1
Theresa and Bob are married and jointly own a property which is let for £18,000 (gross) per year. The income is deemed to be allocated to them on a 50/50 basis because they are married, and they have not submitted an alternative declaration to HMRC on form 17.
Theresa and Bob are each treated as receiving £9,000 per year from this property. As this is less than the turnover threshold of £10,000 and they have no other self-employed income, they do not need to register for MTD ITSA.
Bob dies on 1 July 2023, so Theresa receives the entire rental income from that date onwards. She reports gross property income of £13,500 on her 2023/24 tax return which she submits in January 2025.
Theresa will have to comply with MTD ITSA from 6 April 2025, her first MTD ITSA filing date will be 5 August 2025.
How do non-married landlords decide when to comply with MTD?
Where a property is jointly owned by individuals who are not married or in a civil partnership, those owners are free to allocate the property income between them as they see fit, and this allocation can vary year to year (see property income manual PIM 1030). This rule applies even where the jointly owned property is not treated as a partnership.
Example 2
Anthony, Brian and Charles are brothers who jointly own a property that is let for £18,000 per year. If the brothers 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 brothers decide that Brian should take £12,000 of the rental income and Antony and Charles should take £3,000 each. Brian will report gross property income of £12,000 on his 2023/24 tax return which he submits in September 2024.
Brian must comply with MTD ITSA from 6 April 2025, but his brothers Anthony and Charles are not mandated into MTD.
How is the turnover threshold calculated where 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. However, it is the partnership that must make the MTD ITSA submissions, not the individual partners. The partnership income of the individual partner is not “qualifying income” for MTD. The nominated partner in the partnership will be responsible for complying with the MTD ITSA rules.
Example 3
Alice and Bert run Punch and Judy seaside show 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 Alice and Bert partnership does not have to register for MTD ITSA.
Alice and Bert also let a property and receive gross rents of £6,000 each. Although Alice and Bert each have total income from self-employed trading and property of £10,500 per year, they do not have to comply with MTD ITSA. This is because their partnership income is not treated as part of their income for the MTD turnover test.
HMRC says it is still working through the details of how MTD ITSA will operate for partnerships, and it will issue further information in due course.
Must non-resident landlords comply with MTD ITSA?
Non-resident landlords whose gross income from UK property exceeds £10,000 per year will be required to sign up for MTD ITSA.
Letting agents already have to submit quarterly reports and pay tax quarterly on behalf of non-resident landlords who are within the non-resident landlord (NRL) scheme. If the letting agent doesn’t do this the tenant of the UK property should.
I asked HMRC if letting agents will have to submit quarterly reports under the NRL scheme as well as quarterly MTD submissions on behalf of the landlord. This is the answer: “HMRC will set out details in relation to how MTD for Income Tax and the non-resident landlord scheme will operate in due course.”
Must UK landlords of overseas property comply with MTD ITSA?
UK resident landlords whose foreign property income exceeds £10,000 per year will be required to sign up for MTD ITSA.
I asked HMRC what exchange rate the landlord should use to calculate the income for the purposes of the turnover threshold and received this slightly confusing answer:
“Customers should use the currency exchange rate at the time the income arose or use the rates that HMRC annually publishes for the purposes of converting foreign currencies into sterling.”