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Make Tax Digital

How Will Landlords Have To Manage Their Finances By 2025?

Contents

The government has announced several major changes being implemented over the next few years that landlords need to be aware of including how landlords will need to file their taxes and changes to the required energy efficiency of a rental.

In order for landlords to prepare in good time to minimise the financial and managerial impact that these coming changes will have on their rental business, they need to become familiar with and form a strategy to address them.

In this article, we take a look at some of the fundamental changes that will be occurring in the UK real estate market over the next few years.

In our upcoming series of articles, we will discuss each of these topics in greater detail as well as how you as a landlord can best prepare to face the industry changes and associated challenges. 

digital taxes

How will Make Tax Digital Change how landlords keep their books?

One of the most major changes that landlords need to be aware of at this time is MakeTax Digital. This is the HMRC’s initiative to optimise tax returns by digitising the entire flow. There are two key things you need to know about the MTD scheme.

The first is that this change is coming into effect for landlords and sole traders with an income of above £10,000 in April 2023.

The second is exactly what this means for you as a landlord. The primary takeaway is that you will need to use approved software to digitally submit your tax returns on a quarterly basis.

You can find out more information about MTD here.

Open Banking Innovations

Open banking is already here – however, new advances and improvements will continue to make it more effective. Open banking is an opportunity for people and businesses to use their transaction data to improve their services and optimise their processes. What this means is that businesses are able to offer access to financial data inside their software.

As a result of these innovations apps like Landlord Studio can allow you to securely view your financial transaction data. You can then reconcile payments with a few quick taps removing the need for complex manual data entry. As these innovations continue to advance we expect it to become possible to entirely automate the income and expense tracking related to your rental business.

How Will EPC Changes Impact Landlords?

The Energy Performance Certification (EPC) was first introduced in England and Wales in 2007. The EPC rates a property’s energy efficiency on a scale from A to G, with A being most efficient and G being least efficient.

Landlords are responsible for ensuring their properties are in line with the regulatory guidelines – currently, they stipulate that rental properties must have an EPC rating of at least an E and that they must get a new EPC every 10 years.

However, under the new EPC regulations, landlords will need to improve their EPC rating to a minimum of a C by 2025.

Landlords will be expected to pay for either insulating their properties to retain heat or use other ‘fabric first’ features that can help to improve heating and lighting efficiency. These upgrades could easily end up costing landlords thousands, especially those with older properties. As such it’s well worth becoming familiar with what you can do to start improving this rating as soon as possible in order to spread the cost out.

The new regulations stipulate that you must have an Energy Performance Certification of at least a C if you want to market your property from 2025 onwards and you must get the certificate by 2028 for existing tenancies.

Summary New Energy Performance Certificate (EPC) requirements:

  • All new tenancies from 1 April 2025 and all existing tenancies by 1 April 2028 must meet band C or higher on an EPC.
  • Requiring a valid EPC to be in place at all times while a property is let.

Aiming for a better EPC rating will mean lower energy bills for tenants, reducing their carbon footprint, and will actually make your property more attractive to potential buyers or tenants.

epc regulations

What changes are coming to taxes and how will these changes affect landlords?

The UK government has suggested the following changes will be made, bringing the Capital Gains Tax (CGT) rate closely in line with income tax rates and decreasing the CGT allowance.

Current CGT rates

10% on assets and 18% on property for basic rate tax payers and 20% and 28% respectively for higher and additional rate tax payers.

Additionally, you can currently realise gains of up to £12,300 within your CGT allowance and therefore no tax is paid on that element

Proposed CGT changes

The proposed changes include consideration to CGT rates coming more in line with income tax rates which currently stand at 20%, 40% and 45% for basic, higher and additional rate taxpayers respectively.

It is suggested that your CGT allowance could be reduced to between £2,000 and £4,000.

In very simple terms, it is possible that:

  • Less of your taxable gains will be free from tax
  • The taxable gains you do have are likely to incur tax at a higher rate than at present

Will More Landlords Open Ltd Companies Instead Of Operating As Sole Traders?

Because of the changes occurring in the way that rental income and capital gains are taxed, there has been a spike in applications for landlords to set themselves up as limited companies. By doing so they are able to take advantage of corporate tax rates as supposed to being charged standard income tax rates. However, despite there potentially being substantial savings, it’s not something to rush into, there are many pros and cons to weigh up first.

Final Words

The rental market is constantly changing, whether we like it or not. Landlords need to be moving to digital solutions for the financial and accounting needs as well as planning their finances today to make the most of potential tax breaks and avoid potentially large expenses relating to upgrading their properties energy efficiencies.

Over the next few months, we will be putting together more detailed content and advice on how to deal with and manage these changes so sign up to our newsletter here to get notified.

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