Property income

• Different types of property income:

– Property business profits from rental/lease of
property
– Premium received on grant of short lease
– Profits from commercial letting of furnished
holiday accommodation
– Rental income received from the rent a room
scheme
 Property business income
• Income from land and buildings in the UK is taxed as
non-savings income
• A taxpayer with UK rental income is treated as running a
business.
• All the receipts and expenses for all properties are pooled, to
give a single profit or loss.
• Main taxable receipt for a property business is rent paid by the
tenant to the landlord taxpayer, which is usually in the form of
money.
• If the tenant is required to pay a security deposit to cover
costs such as unpaid rent, cleaning or making good damage
by the tenant at the end of the tenancy, this is not treated as a
receipt unless and until the landlord becomes legally entitled
to use it under the terms of the deposit.
 Property business income
• Deductible expenses include repairs to the property, agent’s
fees, insurance, and rent payable where a landlord is renting
the property which they in turn let to others.
• Capital expenditure (for e.g. mortgage capital repayments,
construction of an extension or boundary wall) is not usually
deductible.
• Cash Basis
– The default basis for calculating property business income for
individuals is the cash basis.
– The property business profit under the cash basis is calculated
as:
• Rent received in the tax year; less
• Expenses paid in the tax year.
– Note that there is automatic relief for irrecoverable rent (to the
extent not covered by a security deposit) since rent is only
taxable on the cash basis in the tax year if it is actually received
in that tax year.
 Property business income
• Accruals Basis

• Property business income can alternatively be

calculated on the accruals basis as rent
receivable (rather than received) and expenses
payable (rather than paid).
• This is in accordance with GAAP/
• Where the accruals basis is used, relief is
available for irrecoverable rent as an impairment
loss.
 Property business income
• Accruals Basis

• The accruals basis must be used in certain circumstances

including the following three situations:
1. If the property income cash basis receipts for the tax year
exceed £150,000 (reduced proportionately if the property
business is not carried on for a full tax year);
2. The property business is carried on by a company;
3. An election is made for the accruals basis to apply. The
election must be made by the 31 January which is 22 months
from the end of the tax year concerned. The election only
applies for the tax year for which it is made.

Note: It should be assumed that the cash basis is to be used in

exam questions unless specifically stated to the contrary
 Property business income
• Example

• On 6 May 2019 Gavin bought a house which he immediately let out

at a rent of £2,700 a quarter (3-month period) payable on 6 May, 6
August, 6 November and 6 February. The tenant paid only 1 month
out of the 3 months of the rent due on 6 Feb 2020 and left the
property on 5 Apr 2020 without giving notice. The remaining
2-months rent is irrecoverable. Gavin paid an insurance premium of
£450 on 6 June 2019 for the 12-month period to 5 June 2020.

• Compute Gavin’s property business income for the tax year 2019/20
if:
• (a) the cash basis applies; or
• (b) Gavin elects to use the accruals basis.
 Property business income
Finance costs for individuals

• A special rule was introduced from 2017/18 relating to

interest and other finance costs (including incidental
costs incurred in obtaining loans such as fees or
commission payments) for property businesses carried
on by individuals (not companies).
• The effect of the rule is to restrict tax relief on these
costs to the basic rate.
• The tax liability of basic rate taxpayers will not be
affected by this new rule but higher and additional rate
taxpayers will have an increased tax liability.
 Property business income
Finance costs for individuals
• The rule applies to loans taken out for a residential
property business.
• It does not need to be for the purchase of the property
only; it could be a loan taken out to pay for repairs to the
property.
• The rule is being phased in over four tax years.
• In 2019/20, 25% of the finance costs are deductible in
the computation of property business income in the
same way as other expenses.
• The remaining 75% multiplied by the basic rate of tax is
a tax reducer.
• The 75% finance costs restriction is given in the Tax
Rates and Allowances.
 Property business income
Finance costs for individuals
• Example
• Millicent bought a house on 6 April 2019 and let it out
throughout 2019/20 at a monthly rental of £1,500 which
she received in full by 5 April 2020. She bought the
house with a mortgage loan and in 2019/20 she made
capital repayments of £1,000 and paid interest of £4,000.
Millicent had other property business expenses (all
deductible) of £2,500 for 2019/20. Millicent had other
taxable income (after deduction of her personal
allowance) of £60,000 in 2019/20.
• Compute Millicent’s income tax liability in respect of her
property business income for the tax year 2019/20.
 Property business income
Mileage allowances
• A landlord may incur motoring expenses using their own
transport, such as a car or van, in relation to their
property business.
• If the landlord is an individual, they can either deduct the
actual motoring expenses or use approved mileage
allowances. This applies to both the cash basis and the
accruals basis.
• Approved mileage allowances are calculated as the
business mileage times the appropriate rate per mile.
The relevant mileage rates for motor cars and vans are
45p per mile for the first 10,000 miles, then 25p per mile
thereafter.
• These rates are the same as the approved mileage rates
for employment income.
 Property business income
Replacement of domestic items relief

•No relief is given for the initial cost of providing domestic

items.
•Relief is given if a domestic item is replaced.
•Domestic items are defined as furniture, furnishings,
household appliances and kitchenware.
•E.gs are: beds, televisions, fridges, freezers, washing
machines, carpets and other floor coverings, curtains,
crockery and cutlery.
 Property business income
Replacement of domestic items relief
•Domestic items do not include fixtures which
become part of the property including boilers and
radiators.
•The amount of relief is the expenditure on the new
replacement asset less any proceeds from selling
the old asset which has been replaced.
•If the new asset is not the same, or substantially
the same, as the old asset, only the cost of an
equivalent asset is given relief.
•Try Peter e.g.
 Furnished holiday lettings

• Receipts and payments of a furnished holiday

letting (FHL) will usually be calculated using the
cash basis, unless the taxpayer is required to
use the accruals basis or has elected to do so.
• A FHL is basically treated as if it were a trade.
• Although the income is taxed as income from a
property business, the provisions which apply to
actual trades also apply to FHLs.
 Furnished holiday lettings
The following differences between normal property
businesses and FHLs exist:
a)Finance costs for individuals are not restricted.
b)Capital costs of furniture are deductible when paid if the
cash basis is used (or capital allowances are available on
furniture if the accruals basis is used) instead of
replacement domestic items relief.
c)The income qualifies as relevant earnings for pension relief.
d)Capital gains tax rollover relief, entrepreneurs’ relief and
relief for gifts of business assets are available.
 Furnished holiday lettings
• Qualifying conditions for furnished holiday
accommodation:
– Property situated in UK
– It is let furnished
– Letting is on a commercial basis (objective is to make
profits)
1. Availability condition: accommodation is available for
commercial let as holiday accommodation to the
public generally for at least 210 days during the year
 Furnished holiday lettings
2. Letting condition: accommodation is commercially let as holiday
accommodation to members of the public for at least 105 days
during the year
If taxpayer has more than one property, at least one of which
satisfies the 105 days rule (‘qualifying holiday accommodation’) and
at least one which does not, (‘the underused accommodation’), he
may elect to average the occupation of the qualifying holiday
accommodation and any or all of the underused accommodation. If
the average of occupation is at least 105 days, the underused
accommodation will be treated as qualifying holiday
accommodation
3. The pattern of occupation condition: Property must not be let for
periods of ‘long-term occupation’ in excess of 155 days in a year.
Long-term occupation is a period of more than 31 consecutive days
when the property is let to the same person unless there are
abnormal circumstances
 Rent a room relief
• Individual lets furnished accommodation in his or
her main residence: income is liable to tax and a
special exemption applies
• Gross annual rental receipts (before any
expenses) of £7,500 or below are exempt from
tax
• This limit is halved if any other person (e.g
spouse/civil partner) also received income from
renting accommodation in the property
 Rent a room relief
• If gross rents are not more than the limit, the rents are
wholly exempt from income tax and expenses are
ignored.
• If gross rents more than the limit, individual will be taxed
the ordinary way on the profit from letting (rent less
expenses), unless they elect for the ‘alternative basis’.
• If an election is made, he will pay tax on the excess of
this gross receipts less £7,500 with no deductions for
expenses.
• Again, the receipts and expenses will usually be
calculated using the cash basis, unless the taxpayer is
required to use the accruals basis or has elected to do
so.
 Rent a room relief
• E.g: Sylvia owns a house near the sea in
Norfolk. She has a spare bedroom and during
2019/20, this was let to a chef working at a
nearby restaurant for £148 per week which
includes cost of heating and electricity. Sylvia
estimates that each year her lodger costs her an
extra £150 on gas, £125 on electricity and £50
on buildings insurance. What is Sylvia’s property
income for 2019/20 assuming that she makes
any beneficial election?
 Premiums on leases
• Premium: a lump sum payment made by tenant to landlord in
consideration for the granting of lease
• Premium may be partly taxable as property income received
(cash basis) or receivable (accrual basis) in the tax year of the
grant.
• Short lease: lease for a period of less than or equal to 50
years
• Amount assessable as property business income: Premium
less 2% of premium for each complete year of lease (other
than the first) :
– Premium Less [Premium x 2% x (duration of lease – 1)]
– Duration of lease is no. of complete years (ignore parts of
a year)
• This rule does not apply on the assignment of a lease (one
tenant selling his entire interest in the property to another)
 Premiums on leases

• E.g: Janet granted a lease to Jack on 1 March

2020 for a period of 40 years. Jack paid a
premium of £16,000. How much of the premium
received by Janet is taxed as property income?

• Note: If Janet owned a 40 year lease and

assigned it to Jack, no part of the amount
received would be taxed as property income