COURSE: ACCA – TAXATION (TX)

Lecture Topic: Property Income

1. Property business income

o A taxpayer with UK rental income is treated as running a business.

o The taxable amount is the profit from this business. This profit is referred to as property business income or
property business profit, and is computed as follows:
£
Rental Income X
Add: Taxable part of Premium X
X
Less: Allowable Expenses (X)
Property Business Profit X

o These profits are computed for tax years.

o Property business profits (or losses) are normally calculated on the cash basis. However, it is possible to opt to use
the accruals basis. In addition, if the gross rents receivable exceeds £150,000, the profits (or losses) must be
calculated on the accruals basis.

o Where an individual lets out more than one property, all the rents and expenses for all the properties are pooled, to
give a single profit or loss.

1.1 Income

The following income is treated as property income:

1. Rents receivable under any lease or tenancy agreement, and

2. The taxable part of a premium received on the grant of a short lease (see note 2 on page 2).

1.2 Expenses

The expenses that are allowable as deductions from the property business income follow the same rules as for normal
businesses. The following expenses are most likely to appear in a question:

1. To be allowable expenses must be wholly and exclusively incurred in connection with the business, e.g. insurance,
agent’s fees, management expenses, utilities, repairs, etc.

2. Repairs are allowable, but improvements (capital expenditure) are not.

3. Relief is available for irrecoverable rents as an impaired debt (bad debt).

4. Capital allowances are not normally available. Instead, for furnished (or semi-furnished) lettings, the landlord
can deduct (as an expense) the cost of replacing furniture and furnishings, such as beds, appliances, carpets,
curtains, crockery, etc.

There is no relief for the initial cost of furniture and furnishings. There is only relief when assets are replaced.

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 The amount of relief is reduced by any proceeds from selling the old asset which has been replaced. Also, relief is
not given for any cost which represents an improvement.
1.3 Property Income Finance Costs

Where a landlord incurs finance costs (such as mortgage interest) in respect of the purchase or repairs of residential
property, this interest is not a deductible expense when calculating property business profits.

Instead, tax relief is given at the basic rate of tax of 20% of the finance costs. This relief is given as a credit against the
individual’s income tax liability.

Note that this restriction does not apply to furnished holiday lettings or to non-residential property such as an office or
warehouse.

2. Premiums received on the grant of a short lease

o A premium is a lump sum payment made by the tenant to the landlord in consideration for the granting of a lease,
i.e. where the owner of a property gives the tenant the exclusive right to use the property for a fixed period of time

o A short lease is a lease for a period of 50 years or less.

o Where such a premium is paid by a tenant to a landlord, part of the premium is treated as income received by the
landlord in the year in which the lease is granted.

The assessable (taxable) part of the premium is calculated as: P × (51-D)

50
Where:

P = Total Premium
D = Duration of the lease in years

o Note: This rule does not apply on the assignment of a lease (one tenant selling his entire interest in the property to
another).

3. Rent a room relief

o If an individual lets a room or rooms, furnished, in his main residence, a special exemption may apply:

If the gross annual rents (before expenses) are £7,500 or less, they will be exempt from tax.

o However, the taxpayer may make a claim to the Revenue to ignore the exemption for a particular year. This would
be beneficial if, for example, a loss was incurred after taking account of expenses.

o If the gross annual receipts are more than £7,500, an individual has two choices as to how to compute the property
business profit:

(1) Rent minus expenses, (the normal way to compute property business profits).

(2) Rent minus £7,500 (without relief for expenses).

o The limit is reduced by half to £3,750 if, during a particular tax year, any other person also received income from
letting accommodation in the property.

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4. Property Business Losses
o Property business losses are carried forward and set against future property business profits.

5. Furnished Holiday Lettings

There are special rules for furnished holiday lettings (FHLs).

5.1 Conditions:

A letting will only be treated as a furnished holiday letting if it satisfies the following conditions:

1. It is furnished
2. It is let on a commercial basis with a view to the realization of profits
3. It is available for letting for at least 210 days a year
4. It is actually let for at least 105 days during the year
5. No more than 155 days in total are periods of ‘longer term occupation’.

‘Longer term occupation’ is defined as a continuous period of 31 days in which the property is occupied by
the same person.

5.2 Tax treatment of Furnished Holiday Lettings:

 The profits are assessable as property income.

 Losses from a furnished holiday letting can only be carried forward and set against future profits from
furnished holiday lettings.

 The letting is treated as if it were a trade, which results in the following tax advantages:

1. The profit from a furnished holiday letting qualifies as relevant earnings for pension tax relief purposes.

2. Capital gains tax rollover relief, entrepreneurs’ relief and relief for gifts of business assets are available
where appropriate.

3. Furniture and equipment purchased for use in a furnished holiday letting qualify for capital allowances
instead of the replacement furniture expense.

If someone has furnished holiday lettings and other lettings, draw up two profit and loss accounts as if they had two
separate property businesses.

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Questions

1.
Charlie owns a house, which he rents out fully furnished. The house had been rented for £800 per month for the two years
up to 31 December 2022. The tenant left owing one month’s rent which Charlie was unable to recover.

From 1 January 2023 a new tenant occupied the property and the rent was increased to £880 per month. The rent due for
January 2023 and February 2023 was paid on time but the rent for March 2023 was not paid until 24 April 2023.

Charlie’s expenditure in respect of the house was:

1. House contents insurance: £600 in January 2022 and £800 in January 2023. Both amounts were paid in advance
for the year to come.

2. During April 2022 Charlie furnished the property with a cooker costing £440, a washing machine costing £330,
and floor coverings costing £2,200. The cooker was sold during December 2022 for £110 and replaced with a
similar model costing £460. The washing machine was scrapped, with nil proceeds, during March 2023. It was
replaced by a washer-dryer costing £670, although the cost of a similar washing machine would have been £360.

3. A new entrance porch: £1,500 in June 2022.

Calculate Charlie’s property business profit for the tax year 2022-23.

2.
On 6 April 2022, Fang purchased a freehold house. The property was then let throughout the tax year 2022-23 at a monthly
rent of £1,000.

Fang partly financed the purchase of the property with a repayment mortgage, paying mortgage interest of £4,000 during
the tax year 2022-23. The other expenditure on the property for the tax year 2022-23 amounted to £1,300, and this is all
allowable.

For the tax year 2022-23, Fang has a salary of £80,000.

What is Fang’s income tax liability for 2022-23?

3.
Sven granted a lease to Ingmar for a warehouse on 10 December 2022 for a period of 11 years. Ingmar paid Sven a
premium of £8,000.

How much of the premium received by Sven is taxable as property business income in 2022-23?

4.
Edmond owns a leasehold office building that is let out unfurnished. Edmond pays an annual rent of £6,800 for this
property. On 6 April 2022 the property was sub-let to a tenant, with Edmond receiving a premium of £15,000 for the grant
of a five-year lease. He also received the annual rent of £4,600 which was payable in advance. During the tax year 2022-23
Edmond paid insurance of £360 in respect of this property.

Calculate Edmond’s property business profit for the tax year 2022-23.

5.
During the tax year 2022-23, Gina rented out a furnished room in her main residence. She received rent of £8,540 and
incurred allowable expenditure of £2,140 in respect of this room.

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Calculate the property business income assessable on Gina for 2022-23.