Are you prepared for this huge tax change?

0:01Rob Bence:Hey everyone, Rob B here with Rob D and you are listening to the Property Podcast. Now this week we're talking about a change that's going to impact millions of landlords. This is not some optional homework that we might need to do. No, for millions of us, myself and Rob included, we will need to be doing this and it's completely different to what's gone before. Now with tax, it can be a tricky subject. So luckily, we've got an expert on this week who can guide us through the process and make sure we are the most efficient landlords and investors possible.

0:41Nadeem:Welcome to the Property Podcast. In case you don't know, we run a business that buys more than£100 million worth of property every year for our clients. You can find out about that at propertyhub.net slash invest. And when you're investing, of course, you need to know about all the property stuff. You need to know about mortgages and you need to know about tax. That is why sometimes we bring experts onto the show, specialists in those areas to enlighten us all. And that is exactly what we've done today. So keep listening.

1:03Rob Bence:It's time for our news story of the week now. And we've got some really interesting data to take you through. This has been released by the ONS, the Office of National Statistics. They have produced a report on private rent and house prices. And Rob, each week we cherry pick the most interesting news story. And we had to pick this news story because we do love a bit of data.

1:22Nadeem:Yes, and rental data is really interesting at the moment because we obviously had those few years when rents went absolutely bonkers. But the trend over the last year has been coming back down to something more normal. And that's continued in this data. The rate of rental inflation now at 4%, which isn't that much higher than inflation. Inflation at 3 % in the moment. So those rocketing rents of roundabout 22, 23 do seem to be over or over in much of the country anyway, because the thing that really stood out to me from this data was the regional picture because i can't remember there ever being such a difference between different parts of the country in the rates of rental growth unsurprisingly perhaps london had the lowest rate of growth only 2.1 so below inflation of course but the northeast the highest rob 7.9 wow that's crazy the difference that is

2:09Rob Bence:absolutely huge and that that very much lends itself to what you've said previously rob that recently you've noticed rents in your area in London to have softened but there's that anecdotal evidence and then there's the hard data and when you see the hard data and the variance between these areas it's absolutely crazy not far behind the northeast is the northwest in second place then it's east midlands in third place northwest being above six percent and east midlands being above five percent so while the average may be just shy of four there's as you can see the regional story here is really interesting and we often will see that with house prices and the data reflects that here as well it shows the vast difference in house prices it shows london falling and it shows the northeast and northwest as the strongest performers again for house price growth but seeing such a variance in rent is really interesting and something that we not really talked about too often on this podcast and that's why i love doing this segment of the show because let's face it the bbc aren't putting this on their home page but you as an investor These little stories that we can pick up and bring to you help you become a more informed investor.

3:14Rob Bence:So I hope you're geeky enough to appreciate this week's news story as much as we've enjoyed it. This is a really important subject, what we're going to cover today, because millions of landlords are about to face one of the biggest changes in years, which is making tax digital for income tax. But millions of landlords don't know. They just don't have the awareness. or if they've heard about it they don't understand what it is you know what I was one of those landlords I kept hearing about it I knew it was coming but let's face it it wasn't something that I was desperate to find out about but as that deadline is now get rapidly getting closer and closer we need to know about it it's not optional and all of us the millions of us need to be prepared and need to know exactly what we're doing so this week we're very lucky to have Nadeem from ProVesta sit down with Rob D and talk about what making tax digital actually means, who it affects, and most importantly, what landlords need to do now to avoid being caught out.

4:17Rob Bence:It's a must listen episode because we're all involved. We all need to understand whether you're an aspiring investor or a current one, this is part of the world now that we live in and you need to understand what is going on. So I'm going to hand it over now to Mr. D and Nadeem to take us through all the core details.

4:36Nadeem:So Nadeem, it's called Making Tax Digital, but what actually is it?

4:41Rob Dix:Yeah, so Making Tax Digital is HMRC's new system for reporting rental and self-employment income. And instead of one tax return per year, which everyone is used to filing by 31st of January, you'll now be submitting quarterly updates digitally. And it's mandatory for landlords and sole traders who are earning above a certain threshold, which is£50 ,000 starting April 2026. And the key points really are here that it replaces the traditional kind of self-assessment, you know, one time per year, 31st of January, you know, providing your account with a shoebox of receipts and paperwork. And that's now replaced with four quarterly updates per year, which are due on the 7th following the month of each quarter.

5:20Rob Dix:So that's sort of April, May, June, July, August, September, October, November, December, and then January, February, March. So very much in line with how VAT returns are submitted for corporations. now done for self-employed individuals and property landlords. And there's the final declaration, which is still due by 31st of January, which is still effectively a tax return. That's also due. So you could argue there's five now submissions required as opposed to the historic one that you do. And obviously the key thing now is that you must now use an MTD compatible software, you know, no paper returns, no manual HMRC forms, all your bookkeeping must be done digitally and submit it to HMRC electronically every quarter.

5:59Nadeem:So the shoebox days are over. So you're having to do everything electronically and more frequently, but critically, you don't have to pay tax every quarter, right? Just report your numbers.

6:09Rob Dix:Absolutely. Yeah. So the fundamental difference there to a VAT return, the example I gave is that there's no actual payments that are due every quarter. This is just a reporting requirement of your income and expenses, and it forces you to do it in a digital form using a digital platform. And obviously what they've done with the thresholds and the dates is they phase this in so it's not affecting everybody straight away we are starting with a qualifying income of£50 ,000 or more for self-employed or property or combination of the two and that's mandated from 6th of April 2026 and that's based on your 24-25 income we then have a qualifying income of£30 ,000 plus which will start from 6th of April 2027 and that's based on your 25-26 return so actually when you look at your 25-26 income that will factor whether you're then actually caught from April 2027.

6:54Rob Dix:And then finally, from April 2028, where the qualifying income is for£20 ,000 plus, where HMRC expects 85-90 % of landlords to actually be within the system by then. And again, that would be based on then your 26-27 return. So really important to keep an eye on your income for the next few years to make sure you're aware of when you fall, if you fall. There are a few nuances as well within MTD, which is once you are actually in it, you can't leave within three years of being in MTD. So if, for example, your turnover is your qualifying income goes above 50 ,000 and you're in as of April 2026. If in 26, 27 and 27, 28, your income goes below 50 or even below the other thresholds of 30 and 20, you're actually still within MTD and you're caught within MTD for three years because you've already qualified in that first year.

7:47Rob Dix:A lot of nuances, lots of little things to be aware of. Very important to be having a conversation with your accountant about, I'm sure we'll come on to this point later on. So really important to have a real clear picture of what MTD now means for you as a landlord.

8:00Nadeem:Yeah. And there'll be a lot of people who've got properties mostly in limited companies, because that's so popular now and limited companies not affected by this. But there are a lot of people who've got their properties in a limited company now, but they might have one property that they've got historically or for some reason that they still own it as an individual. In that case, unless the rent is higher, that might not affect them from 26. But as that threshold comes down, it sounds like it's going to catch most people in the end. So even if you do have just that one property, but everything else is in the company, MTD is still going to

8:37Rob Dix:become relevant for you. Absolutely. Yeah. So I mean, and HMRC have already come out and said that below£20 ,000 is not mandated for now, but it will do. So it's almost teeing us up to say that there is going to be a date in line where it will come to say that even anybody with sort of, you know,£4 ,000,£5 ,000,£10 ,000 with a gross income is an MTD. So certainly worth keeping an eye on those thresholds, having those conversations with the accountants, making sure you're aware of where you are and where you sit in the world of MTD going forward.

9:05Nadeem:So this is something worth paying attention to now even if you are not immediately affected because you will be in the

9:12Rob Dix:end that's right so HMRC are phasing it in like it's like very similar to how they did with VAT and it allows them to get their systems up to date rather than chucking everybody into the system from day one and ultimately who does this apply to it applies with initial threshold of 50 ,000 pounds so the threshold of 50 ,000 pounds it's really important for people to understand this because the common misconception is that the 50 ,000 for, especially for property investors, is profit and it's not profit. It's actually gross turnover, revenue, whatever you want to call it. And that same applies for property income or self-employed income or a combination of the two.

9:47Rob Dix:So if you have property income, gross income of say 30 ,000 and also self-employed where you earn 25, 30 ,000, actually you are caught with an MTD, even though independently they are below that £50 ,000 threshold. Test level is based on your 24-25 tax year. So actually it's really important that you try to get your 24-25 one done already if you've not done it already, because that is what HMRC are basing their assessments on. And that's what you need to be making your assessment on as well. And actually similarly for 25-26, if in 25-26 you meet that criteria, it puts you then into 26-27 for MTD purposes as well.

10:20Rob Dix:So it's really important. It applies to all individual landlords with personally owned properties. All properties are caught within this. So whether you have general vanilla buy-to-lets, HMOs, student-lets, commercial furnished, and actually even overseas properties as well are caught within this MTD digitalization requirement. And the fundamental shift here is that you have a requirement now to digitally keep your bookkeeping records, submit them electronically, and obviously then sort of maintain your records in a better capacity. One important thing, again, a misconception is that people think that every quarter they've got to pay the tax as well.

10:54Rob Dix:That's not the case. Payment is still only due at the end of the tax year and it's not due actually during the quarter itself. So ultimately what we need to be aware of and notify clients is that don't worry, just because we're making you do things on a quarterly basis, you won't have that payment requirement. You've effectively just got a reported requirement. The payment is still done at the end of the year, 31st of January.

11:14Nadeem:Okay, so it sounds like at some point pretty much everyone is going to be having to operate this way. Is there anyone who owns

11:20Rob Dix:property who's not going to be affected yeah so as as you've outlined making touch digital it affects individually self-employed people or personally held landlords currently and we don't see any signs that it's going to affect limited companies making touches won't come in place for limited companies similarly there's no announcement for partnerships or llps for it to be introduced right now or in the in the medium term that could well come later on so right now limited companies partnerships have no requirement to register for making that digital and i think the last one potentially in terms of misconception in terms of when you have jointly owned properties between husband and wife people think oh do we do not need not need to register because we're a partnership in the sense of having jointly owned properties the same rules apply in terms of looking at the split of your income so if you are husband or wife brother sister who's doing something in a joint capacity hmrc will look at your share of the income so again if you have 60 000 pounds with the gross income, each of you need to look individually whether you're caught with an MTD based on your respective shares.

12:19Rob Dix:So if that's 50-50, one has 30, the other has 30, you then need to confirm yourself individually whether you're caught with an MTD or not.

12:26Nadeem:So it seems like at some point, everyone who isn't operating in a limited company or a formal partnership or LLP is going to have to operate in this way. It seems like quite a big change. I think a lot of property investors are used to the way of operating where you just wait till the end of the year then go and sort of like dig everything out chuck it at your accountant and hope for the best but this seems pretty different so what practically are we going to have to do yeah it's

12:57Rob Dix:quite a fundamental shift away from how people have been keeping their records or expected to file like you said rob so the fundamental thing here is that you will now need to keep detailed sold digital records throughout the year and that's from April all the way to the following April and using some sort of MTD compatible software and tracking your rental income, tracking your expenses and making sure you update HMRC every quarter. Now what does that mean in practical terms? Well in practical terms it still means you can use a software, a spreadsheet for example. We're not saying you'd have to use all singing or dancing accounting software.

13:31Rob Dix:You can still use a spreadsheet format where you've got your income and expenses but that needs to be fed into a making tax digital compatible software which can then can be uploaded and fed into the HMRC system every quarter similarly you can get a sort of an MTD platform which obviously on a subscription basis where you will have to obviously update your bookkeeping as it were every quarter and submit that to HMRC and then obviously the end of the year still do your tax return based on those four quarterly submissions you're doing so it does require you to move away from that shoebox keeping all your paperwork and shoving in a cornflip until you're ready to pass it over to your accountant.

14:09Rob Dix:So a little bit more proactivity from landlords is required now, whether that's sort of straight away from day one, April, or at least every quarter, once every quarter when it's due.

14:19Nadeem:Not everyone is going to be working with an accountant, but a lot of investors are. If you have an accountant, is this something that you would expect them to be submitting for you? And And if so, are they going to be charging more for it?

14:35Rob Dix:Yeah, interesting question, because you will need an MTD compatible software to submit this. So the first question is, does your accountant have a MTD compatible software? Is it just an accounting software? It needs to be able to maintain the records as required for HMRC for MTD purposes. If you are using a spreadsheet, will your accountant accept that? Or will they want that already fed into a platform that goes automatically? programmatically so my advice and provesta's advice is definitely start speaking to your accountant now because if it's not affecting you this year it will affect you this year or the year after so it's going to you know affect you pretty soon for those clients who are who do have an accountant and they have software available to them great for those who don't my advice is go out then have a look at some software providers because hmrc will be offering some free softwares from our experience they're not going to be great because they are designed to be very very simple And as we know, landlords in nature, we have complex needs, complex transactions, and you will need something that's a little bit more robust in terms of record keeping.

15:34Rob Dix:And actually, what you want to do is ideally be in a position where using MTD compatible software, which is ideally for property investors. So have a look around, get yourself in a some sort of MTD platform sooner or later. You don't necessarily need to wait until you actually within the MTD system. you could start you know now and get yourself in a way where you're already doing those electronic submissions every quarter because it's just a good way of doing your bookkeeping and if you're more proactive on it you know the better for you so what you want to do is looking around right now getting the right thing that meets your requirements makes sense and in terms of actually

16:09Nadeem:getting hold of the information if you're using a letting agent they are presumably going to have a lot of the information you need about costs that have been incurred and things like that which they might not be in a rhythm of providing so what's the shift that's going to happen there what are you going to need to ask your agent to do yeah so i mean you're letting agent as they

16:30Rob Dix:haven't before won't do any submissions for you you know they will normally give you your management statement at the end of the month or end of the quarter and then you know say on your merry way and of course most times the statements that they will provide you won't be complete anyway they only have some of the information they won't have you know other costs that you've incurred in terms of your mortgage interest or the repairs or renewals so they may give you an overall summary of your rental income for the period that needs to be fed into your mtd software so if you've got some a software which is i don't know ai led where it can just feed in and drip everything out and sort of allocate where it needs to great but that will need to be still fed into your mtd software sort of line by line as it were so you're actually getting all your costs not just what's been provided from your agent into the software for each quarter.

17:19Nadeem:Yeah, so it's not just the bottom line number, you literally need every transaction that's taken place, right?

17:24Rob Dix:Yeah,

17:25Nadeem:exactly.

17:26Rob Dix:Yeah, because ultimately, what you've got to remember, Rob, we're doing a mini tax return every quarter. And the mini tax return includes all your income and all your expenses. So it's like what you do at the end of the year, you collect all your information, all your expenses, not just what's on a management statement. So that will require you to go and look at your mortgage interest statements and pull out what you need. So that goes into your MTD return. If you incurred cash expenses for any repairs or maintenance or insurance costs, which your management agency company won't be aware of, they will need to go into your return.

17:54Nadeem:It's a good point actually around mortgages, because we normally get mortgage statements annually. If we don't get those quarterly, then are you okay to just enter your interest payment because you know what it is, because you can see it on your bank statement, or is there more to it than that.

18:08Rob Dix:Yeah, and that's a good point, because a lot of people who have sort of a repayment mortgage will rely on that mortgage interest statement at the end of the year, which then goes into the tax return, respectively. So in those instances, you may well need to either request sort of more periodic interest statements, or be on top of actually how much interest you're paying. Now, remember, the quarterly return, we need to, it needs to be as accurate as possible. If there are little things like the mortgage interest, which is, you cannot get because physically, the bank won't provide you the exact amount of interest and you cannot calculate it any other way then you do an absolute best guest estimate because obviously the whole purpose is that when you do your tax return at the end of the year your fifth submission it washes everything out and actually you do everything and then you pay tax according to that so if we're a few pounds off here and there on the quarterly submissions it's not the be all and end all because you're not actually paying any tax based on that it's just submitting records hmrc and then you you wash it out at the end of the tax return.

19:03Nadeem:Okay, so some people will handle their own submissions and will need to talk through how they do that. But some people will be using an accountant. So if you are using an accountant, do they just take care of it and like just kind of it all gets done in the background for you? Or is there anything you have to do?