Across Britain, there are estimated to be more than 2.5 million landlords letting out residential properties. All of them – from ‘accidental’ landlords with a single property acquired through marriage or inheritance to professional landlords with portfolios of multiple properties, will soon have to comply with Making Tax Digital (MTD), the government’s ongoing drive to digitise the UK tax system.
From April 2024, every landlord with a turnover exceeding £10k will be required to report their rental profits in a new way.
MTD will deliver benefits (more on these in a moment) but preparing for the legislation will require landlords to introduce new processes and systems in the short term.
With just 18 months or so left until compliance becomes mandatory, it’s time to take action if you’re affected.
How will things change?
From April 2024, all your accounting records must be held digitally. Instead of completing an annual Self Assessment tax return, you’ll have to supply HMRC with regular updates about your income. Using MTD-compatible software; you’ll need to provide the following:
- Quarterly updates
At the end of each quarter (or more frequently if it helps your situation), you’ll need to submit an online update for income from each property you own. These quarterly updates don’t have to be exact, but the more precise they are, the more accurately they’ll predict your end-of-year tax bill. However, it’s important to remember that these updates won’t account for any adjustments you might make at the year-end.
- End-of-period statements
By 31st January following the end of the tax year, you’ll need to submit an online end-of-period statement (EOPS) for income from each property you own, to include adjustments for any allowances or tax reliefs you’re entitled to claim.
- Final declaration
By 31st January following the end of the tax year, you will need to submit a final declaration agreeing with HMRCs estimate of how much tax you owe. This final declaration allows you to make any corrections or adjustments if you need to. You will only have to complete one final declaration, which will automatically bring together information from all the quarterly updates you’ve submitted. Details of any income you receive from other sources, such as dividends, will also be automatically included to give a complete overview of your tax position
The final date by which you must settle your account with HMRC and pay any tax you owe will remain 31st January following the end of the tax year. The payments on account system will also stay unchanged, so you may be required to make a further payment at the end of July.
MTD will make life easier for landlords
Using MTD-compatible software and submitting regular updates will deliver a range of benefits, including automatic integration with your accountant’s system, improved financial visibility to help you make better-informed decisions, the ability to budget for payments by seeing how much tax you owe at any point, less time spent on accounts admin, reduced risk of human error and more insight into your cash flow.
Get ready for MTD now
MTD for landlords is coming, and the sooner you’re ready, the better. The large number of landlords in the UK means that anyone leaving things close to April 2024 could find themselves caught up in a last-minute rush.
Another reason for preparing now is that getting MTD ready will likely highlight issues around ownership for some landlords. When a property is jointly owned with a spouse or civil partner, HMRC’s default position is that rental income must be reported equally. If a landlord wants to report income in anything other than a 50/50 split, they’ll need to officially change the ownership ratio, which will take time.
Landlords preparing for MTD need to follow three steps:
- Step 1: Register for MTD
You – or your accountant acting on your behalf – must register for MTD by no later than 6th April 2024. It’s important to note that this will not happen automatically, even if you are already registered for Self Assessment.
- Step 2: Get processes in place
The new regulations require you to report to HMRC quarterly rather than once a year. As a result, you’ll have to put new processes in place to ensure you have the correct, up-to-date information available to you when you need it – and this is likely to take a little time to organise.
For example, you might currently receive mortgage interest statements on the anniversary of any loans you have, while insurance fees may be billed annually and service charges six-monthly. Moving forward, you’ll need to arrange to receive quarterly or monthly statements.*
- Step 3: Adopt an MTD-compatible software system
If you’re not already using accounting software, you need to make plans to introduce a solution – and if you are, you need to check that it’s MTD-compatible. You’ll also need to have a conversation with your accountant to understand their capabilities and make sure they can work with the accounting software you choose.
*Setting up processes to receive regular income and expense information in time to complete quarterly reports is likely to be time-consuming. You should therefore prioritise step 2.
We work with many landlords at Inca, so we’re well-qualified to advise and support you as you prepare for MTD. We can assist you with all stages, from setting up processes that will make reporting easy, to helping you decide which software solution is best for your needs.