Rent a Room Relief – Proposed Changes

HMRC have been looking at the rules around rent a room relief and whether the rules around the relief should be changed. 

What is Rent a Room Relief? 

Rent-a-room relief provides that the rent received by an individual from a lodger from their main residence can be exempt from income tax (currently up to £7,500).

Why are HMRC considering changing the rules? 

HMRC are concerned that the idea behind the rent a room relief, to increase the amount of rooms available to rent, is not being used as was initially intended. The relief was introduced in 1992 but over recent years online apps and social media have made it easier for landlords to let out rooms for short periods.

Policy Paper

In a policy paper released 6 July, HMRC proposed a change to the legislation in the form of an additional test that must be satisfied in order for income to be eligible for rent-a-room relief. The test requires the individual or individuals in receipt of rental income to have “shared occupancy” of the residence in question for all, or part, of the period of occupation which gives rise to the receipts.

Who will the changes affect?

The proposed change will affect rentals where the owner does not intend to actually be present in the property at the same time as the lodger. So for instance where there was a major event taking place near the property – for instance a festival or similar event – the owner might let out the house for say two weeks and go on holiday for that complete period. The receipts from the rental would not be eligible for rent-a-room relief as there is no shared occupancy during the period of the rental. The receipts would however be eligible for the property allowance

Where there is an element of shared occupancy, HMRC give the following examples in the policy paper:

  • An individual rents a room in their main residence to a student during term time. The landlord goes on holiday for a week during the rental period. The receipts would be eligible for rent-a-room relief as there is shared occupancy for part of the period of the rental. The receipts would be eligible for property allowance if rent-a-room relief was not claimed.
  • An individual lets their house (their main residence) during the Wimbledon tournament to a visiting family. The individual goes on holiday for the whole period of the rental. The receipts from the rental would not be eligible for rent a room relief as there is no shared occupancy during the period of the rental. The receipts would be eligible for property allowance.

 

When will the changes come in?

Should the changes gain Royal Assent to Finance Bill 2018-19, the changes will come in from April 2019.

We can advise on whether the rent a room relief is available and circumstances where it will not be available once the changes take effect.

 

Trading and Property Allowances

From 6 April 2017, there was a new £1,000 Trading Allowance and £1,000 Property Allowance available to use against trading income and rental income. Although the allowance is designed to be straightforward, as ever, there is always some detail in the rules that is worth considering.

Trading Allowance

The trading allowance can be used against self employment income from 6 April 2017. Here some important points to consider with the allowance;

  • If your total self employment income before expenses in the year is £1,000 or less, you may not be required to submit a tax return.
  • You will have the option of claiming the trading allowance or claiming expenses in the year. It may be more beneficial to claim expenses where allowable expenditure is more than £1,000.
  • The trading allowance cannot be used to create a loss, whereas if you claim expenses in the year, this can create a loss, from which it might be possible to get tax relief.

Property Allowance

The property allowance works in a similar way to the trading allowance. It can be used against rental income when renting out a property that is not your own home/residence.

You cannot use either allowance against;

You can’t use the allowances in a tax year if you have any trade or property income from:

  • a company you or someone connected to you owns or controls
  • a partnership where you or someone connected to you are partners
  • your employer or the employer of your spouse or civil partner

You can’t use the property allowance if you:

 

Making tax digital – the latest

We have previously written about the government proposals, known as Making Tax Digital for Business (MTD).

Unincorporated businesses, including landlords, were expected to be the first to see significant changes in the recording and submission of business transactions but the government has announced a delay to the implementation of the new rules.

The new timetable is being introduced following concerns raised by the Treasury Select Committee, businesses and professional bodies about the implementation of the new rules and to hopefully ensure a smooth transition to a digital tax system.

The government have confirmed that under the new timetable:

  • Businesses will not now be mandated to use the Making Tax Digital for Business system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold.
  • These businesses will be able to provide quarterly updates for other taxes too, but there will be no mandatory requirement to do so. Similarly, businesses that are not VAT registered and those below the VAT threshold who have voluntary registered for VAT can opt to use the system.
  • The government will not widen the scope of Making Tax Digital for Business beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record keeping to become more widespread.

 

VAT quarterly returns

The government has stated – ‘as VAT already requires quarterly returns, no businesses will need to provide information to HMRC more regularly during this initial phase than they do now’. What this statement does not highlight is the fact that currently many businesses do not submit VAT returns direct from software but use spreadsheets. HMRC has previously stated that spreadsheets will need to meet all the necessary requirements of MTD (ie not just keep a record of each transaction but also provide quarterly summary information).

The government has stated:

HMRC will start to pilot Making Tax Digital for VAT by the end of this year, starting with small-scale, private testing, followed by a wider, live pilot starting in Spring 2018. This will allow for well over a year of testing before any businesses are mandated to use the system.

Other parts of the Making Tax Digital (MTD) project

Other parts of the MTD project will continue. In particular the objective of bringing together each individual taxpayer’s information in one online place – a Personal Tax Account – will continue to be progressed. For example, banks and building societies will, from April 2018, be required to report information to HMRC earlier and more frequently, than currently. This information will then feed into the Personal Tax Accounts and will be used by HMRC to estimate tax liabilities.

 

We have created an FAQ page to try and cover some of the questions you may have at the link here.

 

 

 

 

MTD – FAQ’s

We have answered some of the questions you will be likely to have on MTD below. If you would like to contact us to ask us anything, please feel free to. 

VAT Threshold – The VAT threshold is currently £85,000. It is likely to remain the same at April 2019. More info here

 

1)

Q) I currently use spreadsheets to prepare my VAT returns. What should I do?

A) You will need to consider which software you are going to use to prepare your VAT returns and submit them to HMRC from April 2019. We can assist with getting your business set up on software that will comply with the rules from April 2019. FAQ 8 has more information.

2)

Q) I am VAT registered but under the VAT threshold. Will I need to file my VAT returns through compatible software from April 2019 or will I still be able to do this online?

A) As we understand, for businesses under the VAT threshold at April 2019, it will not be compulsory from April 2019, to file VAT returns through software to HMRC and we believe it will still be possible to file the return figures online to HMRC, as has been done previously, until April 2020.

3)

Q) What happens if I am over the threshold at April 2019, and therefore go in to making tax digital, but subsequently, my turnover goes under the VAT threshold?

A) If you begin reporting your VAT returns through software due to being over the VAT threshold at April 2019, and your turnover then drops below the threshold, if you remain VAT registered, you will need to continue to submit your VAT returns through software. If you deregister your business for VAT, due to the turnover dropping below the threshold, then you will not be required to report VAT return figures to HMRC through software, until the next date for all business (2020 or later if delayed) comes in to effect.

4)

Q) Are there any penalties or new penalties for submission of VAT returns April 2019?

A) As far as we know, the penalty regime for late submission or payment of VAT from April 2019 to April 2020, will remain the same is it is currently.

5)

 Q) When will I first have to submit a VAT return through software?

A) If your business is currently over the VAT threshold and remains over the VAT threshold at April 2019, then the first VAT return that commences on or after 1 April 2019, will need to be submitted to HMRC through software.

6)

Q) My VAT quarters are April, July, October, and January. When will the first VAT return need to be submitted through software?

A) The first return that will need to be submitted through software, will be the July 2019 return.

7)

Q) What is compatible software?

A) We understand that HMRC are currently testing with a number of software providers and are planning to produce a list of software providers that they know will be able to comply with the new legislation. We are expecting that to be released in summer. We would also expect that the larger software providers, such as QuickBooks, Xero, Sage, and Freeagent will all be sufficient to comply with the legislation, because they will need to be!

8)

 Q) I use spreadsheets currently to prepare VAT returns, what can I do?

A) There are a number of software platforms that may be able to produce the necessary information and reports needed by HMRC from April 2019 from spreadsheets. This will mean using specified spreadsheet templates, so that bridging software can be used to take the transactions from the software to submit the information to HMRC. We are unsure currently exactly how this will work and how easy to use the template software will be. Our advice, would be to start looking at other providers, such as QuickBooks and Xero, and to look at the free trials. We believe, it may be easier and more time efficient to do this rather than continuing to use spreadsheets.

9)

 Q) Does this mean I will need to start attaching all my invoices to the software transactions and HMRC will be able to see them all?

A) From the information that we have, we believe that HMRC will only be able to see the summary VAT return figures from the submissions (the VAT due, sales VAT, purchase VAT, and net figures). There will not be a requirement from April 2019, to start attaching invoices and receipts to all the transactions in the software.

10)

 Q) Can I just enter the total figures from my spreadsheet in to the software and then submit the VAT return?

A) Although HMRC will only see the summary figures from each VAT return from April 2019, there is a requirement to record all of the necessary transactions in the period to show the date of the invoice, date of the supply, the net amount, the VAT charged and rate of VAT, and the gross amount for all the transactions in the quarter. There will be some exceptions for transactions such as, including the fuel scale charge for private use of a car, or applying the partial exemption VAT rules.

11)

 Q) I use Sage desktop to do my bookkeeping currently. Will I be able to use it to submit my VAT returns to HMRC or will I have to change software provider?

A) If you use Sage desktop, based on the information we have, you will be able to submit VAT returns from April 2019 through the software to HMRC. You will however need to make sure that you are using V24.1 of the software, as older versions will not comply with Making Tax Digital. Some Sage desktop users will be able to update for free, but if you are unsure, you can call Sage and give them your account number to check this.

New Tax Year Update

As the 2019 tax year begins, the thresholds, rates, and allowances will change from 6 April 2018. Details of the allowances and thresholds can be found here.

Dividend Tax

The dividend tax was introduced from 6 April 2016, which is a major change in the way that dividend income is taxed. The dividend allowance was set at £5,000 for the years ending 5 April 2017 and 5 April 2018. The threshold means that any dividends received in the tax year up to the threshold, are taxed at 0%. Any dividends received in the tax year over £5,000, would be taxable at the applicable marginal rates set out below.

Tax band Tax rate on dividends over £5,000
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

From 6 April 2018, this allowance is set to reduce to £2,000 a year. Depending on your other taxable income in the year, this will mean that any individuals that receive dividend income over £2,000, will likely have higher personal tax liabilities. For example, if your total taxable income for the year to 5 April 2019 is within the basic rate band and you receive dividend income over £2,000, then the tax increase could equate to £3,000 x 7.5% = £225.

Corporation Tax Rates

Corporation tax rates reduced from 20% to 19% for all companies from 1 April 2017. If your company year does not run to 31st March, the corporation tax charge will be apportioned between the two rates e.g. if your year end is 30 September 2017, then the profit will be apportioned to the two rates for the period to 31 March 2017 and the period to 30 September 2017.

Mortgage Interest Relief Changes

The changes to the way in which mortgage interest relief is calculated, came in to effect from 6 April 2017. These changes are being phased in over four years to 5 April 2021, as set out below;

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

The changes mean that any mortgage interest payments made in the tax year, are only partially included in the calculation of rental profits (75% of mortgage interest in the year to 5 April 2018) and then a separate tax reducer is included for the remaining mortgage interest at basic rate tax, which will be calculated at 20% of the lower of:

  • finance costs (for example 25% of mortgage interest payments in the year for the year to 5 April 2018)
  • property profits excluding any mortgage interest payments in the year
  • adjusted total income (exceeding Personal Allowance)

The changes could mean that a larger amount of any rental income is taxed than it would have been previously. It could also lead to higher rate tax being due on the rental income, depending on your total taxable income.

Stamp Duty Land Tax

The additional rates for stamp duty that were introduced for purchases of an additional property, were set at 3% above the normal stamp duty rates.

There has also been the introduction of first time buyer rate for stamp duty, which came in from 22 November 2017. The rates are set lower than the standard stamp duty rates, to help first time buyers get on the property ladder. These rates are only available if;

  • You are purchasing your first property to be your main residence
  • You are purchasing a single dwelling
  • The property is purchased for £500,000 or less
  • A company will not be entitled to claim this relief
  • A purchaser must not, either alone or with others, have previously acquired a major interest in a dwelling or an equivalent interest in land situated anywhere in the world. This includes previous acquisitions by inheritance or gift, or by a financial institution on behalf of a person under an alternative finance scheme

More guidance on the relief can be found here.

 

If you have any questions about any of the tax changes, please feel free to contact us

Budget Update – Year to 5 April 2019

From 6 April 2018, the thresholds will change to the amounts set out below (this does not include rates in Scotland).

                                                     2019               2018

Personal allowance                             £11,850           £11,500

National Insurance (PT)                     £8,424              £8,164

Higher rate threshold 40% tax         £46,350           £45,000

Marriage allowance                             £1,185              £1,150

 

Limited company shareholders:

Dividend allowance                              £2,000               £5,000

The dividend allowance is particularly important to owner managed businesses. The allowance of £2,000 for the year to 5 April 2019 is set at a rate of 0%, meaning any dividend income in the year up to £2,000, will be taxed at 0%.

Corporation tax is set to remain at 19% (the same as for the year to 31 March 2018).

 

Self-employed:

There were discussions around raising the rate of National Insurance on Self-employed profits. Class 4 National Insurance is set to remain the same for the year to 5 April 2019.

Class 4 National Insurance                        9%                   9%

Rates for taxable profits

over £8,424 up to                                    £46,350          £45,000

Class 2 National Insurance                      £153.40         £148.20

 

Capital Gains Tax (for individuals):

Annual exemption                                     £11,700       £11,300

 

Paying tax bills

From 13 January 2018, HMRC will no longer be accepting payments from personal credit cards to pay tax liabilities. This will include payments for personal tax liabilitiesVAT, and PAYE.

That means that if you are planning on settling your personal tax liability that is due by 31 January 2018 and was planning on using a credit card, you will need to make payment before 13 January 2018. If you are self-employed, you should assess your finances now to consider how you are going to pay any tax liability that is due by 31 January 2018.

The rule changes have come in due to EU restrictions which prohibits merchant fees being recharged to payers. HMRC cannot currently take payments at a cost to the public finances, so this will mean they are no longer able to accept credit card payments.

 

Marriage Allowance

The Marriage Allowance could help to save you money, if you are married or in a civil partnership and your spouse has taxable earnings under the personal allowance threshold. For the current tax year, you can transfer up to £1,150 of your personal allowance.

Claims can also be backdated to previous tax years if the eligibility criteria is met.

 

How much is the personal allowance?

The personal allowance changes each year. The following allowances applied in the years below;

5 April 2018        £11,500

5 April 2017        £11,000

5 April 2016        £10,600

 

If both you and your spouse file tax returns, you should make sure that the correct sections of your tax returns have been completed to claim the allowance. We can advise on whether you are eligible for the allowance.

 

More information can be found at the following links;

https://www.gov.uk/married-couples-allowance

https://www.gov.uk/marriage-allowance

 

SA302 Forms & Applying For a Mortgage

If you want to apply for a mortgage and you have income in the form of dividends, or you are self-employed, for many years mortgage lenders have requested copies of SA302 forms. These forms were provided by HMRC showing a breakdown of income and the tax paid in each tax year.

HMRC has stopped providing these forms from 5 September 2017. HMRC has said for some time that many mortgage providers should be accepting tax overviews* but we have often continued to request SA302 forms, as we know that some mortgage lenders will not accept tax overviews.

*A tax overview is taken directly from the HMRC website and shows the tax liability in each tax year and the payments towards each liability. 

Now HMRC have stopped providing the SA302 forms, they have published a list of lenders who will accept a tax overview here. We can provide this tax overview breakdown to clients if you are applying for a mortgage.

Making Tax Digital – TIMETABLE UPDATE

An announcement has been made today on a new timetable for Making Tax Digital. The announcement can be read here.

The new timetable will mean that;

  • From April 2019, businesses with turnover above the VAT threshold (which is currently £85,000 a year), will start reporting quarterly through cloud based software to HMRC.
  • All over businesses will not need to start reporting quarterly through cloud based software until “at least 2020.”

This is at least some good news, as it will give businesses more time to prepare for the changes. When the election was called, large amounts of the finance bill were removed, which left some uncertainly as to what would happen with Making Tax Digital. The changes to the timetable will be legislated for as part of the Finance Bill 2017.