New tax rules will impact property investments

George Hay Chartered Accountants

The property sector is no stranger to new tax rules, having been impacted by several significant changes in recent years. Even so, there appears to be little respite as further changes are, once again, on the horizon.

Rent-a-Room Scheme

Currently, the Rent-a-Room Scheme allows people to earn up to £7,500 per year, tax-free, from renting out furnished accommodation in their home.

However, HM Revenue & Customs (HMRC) has revealed new plans to introduce a ‘shared occupancy’ test, which it hopes will ensure that “rent a room relief is being used as originally intended to encourage rooms to be made available for lodgers.”

This additional test means that only those landlords who are living and physically present in the property, during the letting period, will remain eligible for the allowance.

Those letting out their whole property may now find that they are required to pay additional tax, whilst for others it may be the first time they are liable to pay tax.

Landlords who no longer qualify for the generous Rent-a-Room relief will instead have to rely on the much lower £1,000 property allowance.

At present, it remains unclear as to whether HMRC will require taxpayers to prove their shared occupancy, or if it will simply rely on taxpayers’ honesty where the necessary conditions are not met.

The Government will include legislation for the shared occupancy clause in the Finance Bill 2018-19 and the change will take effect from 6 April 2019.

Toni Hunter, property expert at George Hay, commented: “It will certainly be interesting to see how this plays out. Not only will the shared occupancy test generate further complexity within the tax system but is likely also to generate additional administration for landlords, should they be required to keep a record of time spent at the property.”

“It’s debatable whether, in practice, landlords will be able to prove shared occupancy at all and so enforcement is likely to present a challenge for HMRC.”

“It seems to be an ongoing trend, that where the government perceives that it is encouraging investment and stability it is actually deterring established landlords from expanding their portfolios and putting off potential investors from entering the property market.”

“Rent-a-room relief is one of the few ways in which people can supplement their annual earnings in a relatively simple and tax-efficient manner, but the government’s plans are not conducive to this continuing to be the case.”

“Would it not be better, for all parties involved, to leave rent-a-room relief as it is; an easy to understand tax that is relatively straightforward to administer.”

Let Property Campaign

Concerned that some landlords may not be paying the correct amount of tax on their rental property, HMRC has also launched the Let Property Campaign.

This is intended to give landlords the chance to come forward and disclose any unpaid tax in the UK or abroad, allowing them to get their tax affairs in order.

Like other recent disclosure campaigns, once the tax is disclosed landlords have 90 days to calculate and pay what they owe. Full and voluntary disclosure of all unpaid liabilities will typically result in a lower penalty for unpaid tax.

If a person does not come forward and HMRC later discovers that tax is due, it may be harder to convince them that it was a simple mistake.

In these circumstances, taxpayers’ may find that a higher penalty is applied – including fines of up to 200 per cent of tax due or criminal prosecution.

To take part in the Let Property Campaign a person should:

  • tell HMRC that they want to take part in the Let Property Campaign
  • inform HMRC about all income, gains, tax and duties not previously disclosed
  • make a formal offer
  • pay what they owe

There is no predefined ‘window’ within which a landlord must disclose what they owe, but HMRC have confirmed that the campaign will be ongoing for some time.

Here at George Hay, we know that recent tax changes have hit landlords and property investors hard. However, we don’t believe this is reason enough to give up on your aspirations.

We can support you throughout your venture and assist you with proactive and effective tax planning; identifying and taking advantage of opportunities to minimise your tax liabilities and maximise your investment.

To discuss your circumstances in more detail with one of our property experts, contact us today.

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