Property income
Calculation
1. Rental income from letting of furnished (including amount receivables for the use of
furniture) or unfurnished property.
2. Taxable property income depends on level of gross income
Property allowance Cash basis Accruals basis
Property allowance of £1000 Default method if the property Exceeding £150,000
receipts not exceeding £150,000
- If the property receipts do Less any allowable expenses actually Less allowable expenses accrued.
not > 1000, then no taxes. paid during the year
- But expenses in relation to
the property business is
not deducted.
- No relief is available for
finance costs.
- An election can be made
for the relief not to apply.
Over £1000? – normal method
i.e. cash basis
But it is more advantageous to
the taxpayer to elect for this if the
allowable expenses are less than
£1000 because property
allowance deductible is for
£1000.
Allowable Expenses
- Motor vehicles used in property business can claim expense deduction: approved
mileage allowances
o Allowable rates: per business mile travelled in a period:
45p for the first 10,000 miles (25p thereafter)
24p per mile for motor vehicle
- Few conditions:
o Previously claimed capital allowances: no fixed rate deduction can be made
o If it is a goods vehicle or motorcycle trader made as an “allowable expense
deduction” on cash basis – no fixed rate deduction
o If the fixed rate deduction is used, then no other deduction can be made.
o Fixed rate deduction must be used in the future period of this vehicle in
which for business purposes, and not necessarily for other vehicles.
Finance Costs
- Relief for finance cost on letting of residential properties is restricted to the basic rate
of the income tax.
- Eg: mortgage loans, interests on loans to buy furnishings and fees incurred when
taking out or repaying mortgaged or loans.
- No relief for capital repayment of loans.
- General rule is that if the taxpayer receives relief for the finance costs under this
section, property allowance is not available.
- Deduct against tax liability but as 20% of the lower of
o Finance cost of the year plus any finance cost brought forward
o Property income of the tax year (after using any brought property losses)
o Adjusted total income– the income (after losses and reliefs and excluding
savings and dividend income) that exceeds personal allowance for tax year.
- No refund.
- If the deduction is limited by the property income or adjusted total income, then the
remaining finance costs not utilized are carried forward to calculate the basic rate
reduction in the following years.
- Eg: employment income of £24,000 and rental income of £10,000 in 2022/23.
He pays mortgage interest of £8000 and £3000 of other allowable property expenses.
Tax due 2022/23
Frederico
Employment income 24,000
Property income (10,000 -3000) 7,000
Total income 31000
Personal allowance (12570)
Taxable income 18430
18430 X 20% 3686
Less 20% tax reduction for finance costs.
20% of 7000 (1400)
Income tax due 2286
W2 the 20% tax reduction is based on the lower of:
Finance cost of the year plus any finance cost brought forward
£8000
Property income of the tax year (after using any brought property losses)
£7000
Adjusted total income – the income (after losses and reliefs and excluding savings and
dividend income) that exceeds personal allowance for tax year.
(£31000 - £12570 = £18430)
A balance of £1000 (8000-7000) finance costs will be carried forward and added to the
finance costs in 2023/24 entitle to a 20% reduction.
Bad debt relief
- Cash basis rental income is not taxed until a tenant pays automatic bad debt
relief
- Accruals basis if a tenant does not pay the rent, the income is still taxable
o If the debt remains unpaid and the debt is written off by the landlord, relief is
given for the amount written off.
Capital expenditure
- Only available on the cost of P&M used for repair or maintenance of the property.
- Not available for most items of plant and machinery, furniture and other equipment
provided for use in a rental property.
o But the landlord can treat the cost of replacing domestic items, to be used
solely by the tenant, as an allowable expense.
o Eg: furniture, furnishing, household appliances, kitchenware.
o Not including amount that represent an improvement
Expenditure on a replacement asset that is improved purely because
of advances in technology is deducted in full
o Amount deducted can be
reduced by any proceeds from the sale of the old item
increased by any costs of disposal of the old item.
o Capital allowances not applicable to those fixtures and not normally remove if
sold (e.g. baths, washbasins, toilets, fitted kitchen units) and also boilers. But
replacement costs id deductible.
Losses
- No taxable property income in that tax year
- The loss is carried forward and set as far as possible against the first future property
income
Rent a room relief
- Applies to lettings in the taxpayer’s own home.
- Conditions of the accommodation:
o Must be furnished
o Part of the individual taxpayer’s only or main domestic residence
- Depends on the level of gross annual rents (received or receivable will depend on
cash basis or accruals basis)
o <£7500 income and related expenses are ignored for income tax
No property loss arises unless the taxpayer elects to set aside the
relief and claim for property loss.
o >£7500 normal property income rules apply
Alternatively, anything more than £7500, can elect for this relief but
there is no relief for expenses incurred
It applies to subsequent years unless withdraw or rental income less
than £7500.
- For spouse, a max of £3750 can be claimed
- If the taxpayer receives an income eligible for rent a room relief, treat it as a separate
rental income and cannot claim property allowance.
- General rule: if the allowance expenses is more than the rent a room relief (£7500)
- If there is a property loss, elect to set aside.
Pending: self test questions