Do you have to declare property rental income?

You’ve let out a house for years, but your total income has always been less than your tax allowance so you haven’t declared it to HMRC. Will you need to reconsider this in view of the impending major changes to the tax rules for landlords?

 Non-declaration. One of our subscribers owns a property jointly with his wife, which they’ve let to the same tenant for many years. Our subscriber is a higher rate taxpayer, while his wife’s income almost entirely consists of the rent. The rent has been £21,000 per year for a while, which after expenses produces taxable income of around £14,000. Our subscriber has always declared half of this on his tax return, but his wife hasn’t reported anything to HMRC. 

 Is a tax return required? Because of the changes in the tax system affecting landlords, our subscriber thinks his wife might need to start reporting the income. He’s worried that HMRC might ask why she hasn’t done so before, which might result in penalties for failing to declare income. 

 Tip: The good news is that our subscriber can rest easy. Contrary to popular belief, you’re only obligated to complete a tax return if HMRC asks you to. However, you do have an obligation to notify HMRC if you believe that you owe tax. Our subscriber’s wife’s income was well below her personal tax allowance so there was no chance of that. 

 New rules for finance payments. Our subscriber also worries that the new rules from 6 April 2017 – which reduce the deduction that can be claimed for interest and other finance expenses – will result in an increase in the taxable income. Would this be enough to take his wife’s income to the point where tax will be payable? 

 Complex calculations. The new rules for working out the reduced tax deduction are some of the trickiest we’ve ever seen for such a simple adjustment. However, in a situation where your total income is currently below your personal allowance you won’t be affected by the reduction of tax relief for 2017/18 unless the interest etc. you pay exceeds £100,000 (assuming of course that your income doesn’t rise dramatically). Therefore, our subscriber’s wife needn’t be concerned.

 Tip: As our subscriber is a higher rate taxpayer he will be affected by the reduction in tax relief in April 2017. Therefore, to save some tax, he could divert some or all his rental income to his wife.

 MTD spells trouble. One complex issue on the horizon for our subscriber and his wife is “Making Tax Digital”, (MTD), which takes effect in April 2018. This requires landlords who receive rent of £10,000 or more to report their rental income and expenses online to HMRC quarterly, even if they aren’t liable to pay tax on it. Consultation about MTD is ongoing because, as you would imagine, there’s a great deal of opposition particularly to the timetable – which in most experts’ view is unrealistic. The best landlords can do is keep an eye on how MTD progresses.

 We’ll keep you up to date with any further developments. In the meantime, if you need any help then just give us a call on0141 345 2335.

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