THE SILENT WAY
PAR- PROFESSIONAL ACCOUNTANCY REGION
ACCA TAXATION – PROPERTY INCOME
STUDY GUIDE
a) Compute property business profits.
KJK
b) Explain the treatment of furnished holiday lettings
c) Understand rent-a-room relief.
d) Compute the amount assessable when a premium is received for the grant of a short lease.
e) Understand and apply the restriction on property income finance costs.
f) Understand how relief for a property business loss is given.
“Your knowledge should be your real property”
#FromMyPen
Namood E Sahar
ACCA AFFILIATE
Property income is not only related with rental income, whereas, the scope
of property Income is wide.
MIND MAP
PROPERTY INCOME
PROPERTY RENT FROM
LEASE FHL
BUSINESS RENT A ROOM
PREMIUM PROFITS
PROFITS SCHEME
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BASIS OF ASSESSMENT
Assessable income is according to the cash basis. When income received , less
expenses actually arising in the tax year 21/22. It started with 6th April 2021 and ended
at 5th April 2022.
ALLOWABLE DEDUCTIONS
The general rule is that to be allowable, the expenses must have been
incurred wholly and exclusively for the purposes of the property business.
This covers items such as:
insurance agent fees and other management expenses
repairs
interest on a loan to acquire or improve a let non-residential property.
Q1. Hembery owns a property that was let for the first time on 1 July 2021. The rent
of £5,000 p.a. is paid quarterly in advance: Hembery paid allowable expenses of £200
in December 2021 (related to redecoration following a burst pipe), and of £400 in May
2022 (related to repair work which was completed in March 2022).
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FINANCING COSTS OF RESIDENTIAL PROPERTY
✓ Owners of residential property that live in their own property do not get tax relief
for their mortgage costs.
✓ Owners of buy-to-let residential properties however, have historically been
entitled to claim a tax deduction for their finance costs.
✓ Relief is available for any expenditure incurred before letting commenced, under
the normal pre-trading expenditure rules.
✓ If property is occupied for part of the year by the owner, any expenses relating to
private use are not an allowable expense.
✓ There are special rules which apply to capital expenditure incurred by an
individual in a property business.
✓ Tax relief is given on costs at the basic rate (20%) by deduction from the
taxpayer's final income tax liability.
Q2 Adam owns a residential property that he lets out. During the tax year 2021/22 he
received rent of £15,000 and paid the following expenses:
During the tax year 2021/22 Adam also has trading income of £42,000 and bank
interest income of £800. Calculate Adam's income tax liability, after reliefs, for the tax
year 2021/22.
There is no general distinction between revenue or capital expenditure under cash basis.
About capital expenditure
Expenditure on plant and machinery (except cars) used in a property business, such as tools used for
maintenance of the property or office equipment used for running the business is an allowable deduction from
income when paid.
However, this general rule does not apply to: cars assets provided for use in a residential property e.g. furniture,
TV.
capital expenditure on land and buildings is not an allowable deduction, with the exception of some non-
residential properties.
Repairs expenditure is allowable. Improvement expenditure is not allowable
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RELIEFS
Expenditure on assets provided for use in a residential property e.g. furniture, TV is not
allowable. In addition capital allowances are also not available.
However, for furnished residential lettings a special relief, replacement domestic items
relief is available. The relief allows a deduction for the replacement (i.e. not the original
acquisition) of domestic items provided by the landlord. The allowable deduction is:
Replacement cost less any proceeds from the disposal of the original
The replacement cost allowed is limited to the cost of a similar item, excluding any
improvement, but allowing for the modern equivalent.
Domestic items are those acquired for domestic use for example, furniture, furnishings,
household appliances (including white goods), carpets, curtains and kitchenware.
However, 'fixtures' i.e. any plant and machinery that is fixed to a dwelling, including
boilers and radiators are specifically excluded.
Q3 Amal owns a cottage that she lets out furnished at an annual rent of £3,600,
payable monthly in advance. She incurred the following expenditure:
May 2021 Replacement bedroom curtains 150
May 2021 Replacement of one broken kitchen unit in a 275
fitted kitchen with a unit of similar standard
June 2021 Insurance for year from 5 July 2021* previous year $420. 480
Nov 2021 Dishwasher 380
May 2022 Redecoration work*work completed in March 2022 750
The tenant had vacated the property during June 2021, without having paid the rent due
for June. Amal was unable to trace the defaulting tenant, but managed to let the
property to new tenants from 1 July 2021. The new tenants paid a security deposit of
£800 to Amal on 1 July 2021. The old bedroom curtains had no disposal value. A
dishwasher had not previously been provided in the property. Amal drove 120 miles in
her car in relation to the property business during the tax year 2021/22. Amal claims
HMRC's approved mileage allowances. Calculate the property income for the tax year
2021/22.
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Q4 Eastleigh acquired two residential properties on 1 June 2021 that were first let on 1
July 2021. Property A is let unfurnished for an annual rent of £4,000, payable quarterly
in advance. Eastleigh incurred the following expenditure in respect of this property.
20.6.21
29.6.21
1.2.22
Property B is let furnished for an annual rent of £5,000, payable quarterly in arrears.
The tenants were late in paying the amount due on 31 March 2022 – this was not
received until 15 April 2022. Eastleigh incurred the following expenditure in respect of
this property in the tax year 2021/22.
4.6.21
5.6.21
30.6.21
1.7.21
Calculate Eastleigh's property income for the tax year 2021/22.
ACCRUALS BASIS
An individual or partnership may opt to use the accruals basis and it must be used if
property income receipts exceed £150,000. However, in the examination it should only
be used if the question specifies to do so.
Under the accruals basis the main difference is that rental income and related expenses
are assessable/deductible on an accruals basis i.e. the rent receivable and the
expenses payable in respect of the tax year.
If a tenant leaves without paying outstanding rent, under the cash basis the outstanding
amount is never taxed. Under the accruals basis the amount receivable is taxed but the
outstanding amount owed can be deducted as an expense. This irrecoverable debt is
referred to as an 'impairment loss' in the examination.
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Q5 Aubrey owns a property that was let for the first time on 1 July 2021. The rent of
£5,000 p.a. is paid quarterly in advance: Aubrey paid allowable expenses of £200 in
December 2021 (related to redecoration following a burst pipe in November 2021), and
£400 in May 2022 (related to repair work which was completed in March 2022).
Calculate Aubrey's property income, assuming he has elected to use the accruals basis,
for the tax year 2021/22.
Q6 Sheila owns three properties that were rented out. Her assessable income and
allowable expenses for the two years to 5 April 2021 were:
Calculate Sheila's property income/(loss) for the tax years 2019/20 and 20/21.
Q7 For many years Hekla has owned six houses in Upland Avenue that are available
for letting. The following details have been provided by the client:
Rent receivable for the y/e 5.4.22
Insurance paid on 1 June 2021
Annually in advance
The insurance premiums paid for the year ended 31 May 2021 were 5% lower than the
above figures for all properties and were paid on 1 June 2020. Hekla employs a
gardener to look after all the properties, and pays him £1,200 a year. There are also
accountancy charges of £480 a year; both of these costs are allocated equally to each
property. Numbers 23 and 40, had new tenancies in the year. The cost of advertising for
tenants was £50, in respect of number 23 and £100 for number 40. The new tenant at
number 23 took over immediately the old tenant moved out. Unfortunately, the old
tenant at Number 40 defaulted on rent due before the new tenant moved in and rent of
£350 included in the above rent receivable figure for the year was never paid. During
the year Hekla had to replace the carpets in number 40, at a cost of £800. During the
year she also had to replace the crockery at number 21, at a cost of £100 and a
replacement roof for number 25, cost her £8,600. No disposal proceeds were received
in respect of any of the assets which were replaced. Hekla has loans outstanding on
each of the six properties and pays interest of £800 per year on each loan.
(a) Explain how relief for a property business loss can be obtained.
(b) Calculate Hekla's property business loss for the tax year 2021/22.
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LEASE PREMIUM
Property income = Premium × (51 – n)/50
Q8 Wakana granted a 21-year lease to Charles on 1 July 2021, for a premium of
£10,500.
Calculate the amount assessable on Wakana as property income in the tax
year 2021/22.
Q9 Albert granted an 18-year lease to Angeliki for £26,000, on 6 May 2021.
Calculate the amount assessable on Albert as property income for the tax
year 2021/22.
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QUALIFYING CONDITIONS FOR FHL
The letting will only be treated as FHA if it meets the following conditions:
• The property is let furnished.
• The letting is on a commercial basis with a view to the realisation of profits.
• It is available for commercial letting, to the public generally, as holiday
accommodation for not less than 210 days a year.
• The accommodation is actually let for at least 105 days a year
Where a taxpayer owns more than one property, the 105 days test is satisfied if the
average number of days for which the properties are let in the year is at least 105.
The property must not be let for periods of 'long-term occupation' in
excess of 155 days in a year.
The following advantages and reliefs are available:
• The profits are treated as relevant earnings for the purposes of tax relief for
pension scheme contributions
• Finance costs are fully deductible i.e. there is no basic rate tax relief
restriction.
Plant & Machinery
• Cash basis – a deduction is available on a paid basis for plant and machinery
acquired including furniture and furnishings.
Accruals basis – capital allowances are available in respect of plant and machinery
including furniture and furnishings.
Under both the cash and accruals bases these deductions apply instead of
replacement of domestic items relief.
Capital gains tax rollover relief, gift relief and business asset disposal relief
are available.
RENT A ROOM RELIEF
Gross annual rental receipts are £7,500 or less
The income is exempt from tax. The individual's limit of £7,500 is reduced by half to
£3,750 if, during a particular tax year, any other person(s) also received income from
letting accommodation in the property while the property was the first person's
main residence.
This rule allows a married couple taking in lodgers to either have all the rent
paid to one spouse (who will then have the full limit of £7,500), or to have the
rent divided between the spouses (and each spouse will then have a limit of
£3,750). An individual may elect to ignore the exemption for a particular year, for
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example, if a loss is incurred when taking account of expenses.
Gross annual rental receipts are more than £7,500
The individual may choose between: paying tax on the excess gross rent over £7,500
being taxed in the normal way on rental income i.e. profit from letting
(rent less expenses less replacement furniture relief).
Q 10 Shanaya bought a house in January 2021 which she rented out furnished to
students from 1 June 2021. She charged rent of £600 per month, payable in
advance. In August 2021, she paid £900 for the windows in the house to be
repainted, and £500 for replacement carpets.
What is the property business profit for Shanaya for the tax year 2021/22?
A £4,600
B £5,200
C £6,100
D £5,700
Q 11 Ganaraj granted a 45 year lease on a warehouse on 5 July 2021, charging a
premium of £50,000 and an annual rent of £10,000 payable in advance.
What is his assessable property income for the tax year 2021/22?
A £6,000
B £10,000
C £16,000
D £13,500
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Q12 Percy rents out a home fully furnished. The house does not qualify as a furnished
holiday letting. For the tax year 2021/22 his rental income and expenses are:
How much can Percy claim as allowable expenses in calculating taxable property
income in the tax year 2021/22?
A £1,260
B £800
C £1,060
D £5,900
Q13 Maricel rents out a furnished room in her house at an annual rent of £8,050. Her
household expenses in relation to the room are £450 (none of which are capital).
Assuming she elects the most beneficial basis of assessment, what is her
assessable property income for the tax year 2021/22?
A £100
B £550
C £7,600
D £7,500
Q14
Q15
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