Property Income
(for individuals and partnerships)
Property Income – Basis of assessment
Property income = Rental Income received
Less: Related Expenses paid
Allowable deductions
Expenses, wholly and exclusively incurred Financing costs of a let residential
for property business property
Examples - insurance, repairs, agent’s
Tax relief = 20% of finance cost is given as a deduction
fee, interest on loan taken for the
from the taxpayer’s final income tax liability
acquisition, repair or improvement of the
let non-residential property
Property income – Capital expenditure
Expenditure on plant and machinery Expenditure on land and buildings
• Allowable on paid basis (i.e. plant and machinery, tools No deduction allowed but
etc. used in the property business)
- Repairs of revenue nature are allowable
• Exception to the above rule, applies to –
(i) Cars - Improvement of capital nature is not allowed
(ii) Assets provided for use in the residential property
(eg. Furniture, TV etc.)
Allowable deductions - Cars
HMRC’s approved mileage allowances
Option 1
(given in the exam)
OR
Capital Allowances
available on the capital cost of cars First 10,000 miles p.a. – 45 p
+ Over 10,000 miles p.a. – 25 p
Actual motoring costs (eg. Petrol, insurance, etc.)
Allowable deductions – Replacement domestic items relief
What are domestic items?
Also called ‘Replacement
Furniture Relief’
Furniture, furnishings, household appliances, carpets, curtains
and kitchenware. It does not include fixtures.
Rules for Replacement Furniture Relief
• Deduction only for the cost of replacement of domestic items (i.e. no relief for the
initial cost of purchasing the items, is available)
• The amount of relief = Cost of replacement
Less: Proceeds from the sale of the asset being replaced
• For example, a washing machine replaced with a washer-dryer - only the cost of
a replacing washing machine would qualify for relief
Relief is only available for a like-for-like replacement which can be a modern equivalent. No deduction for cost on improvement.
Property income – Accrual basis
Who can opt for the accrual basis of assessment for property income?
Whose property income receipts exceed £150,000
(In the examination, it must be used only if the question specifies so)
Under the accrual basis of assessment The amount unpaid by the tenant can be deducted
as an ‘impairment loss’ under accrual basis
- Assessable income for the tax year
= Rent receivable for the tax year
Less: expenses payable for the tax year
Other rules relating to allowable expenditure are the same as used for cash basis
Premium received on grant of short lease
What is a short lease – a lease for ≤ 50 years
Amount of premium assessable as property income of the landlord:
Premium
Less: Premium × 2% × (n-1)
Property Income
Where n = lease term (ignoring part of year)
OR
Property Income = Premium × (51 – n)/50
This amount becomes taxable for the landlord in the tax year in which the lease is granted
Property Income – Furnished holiday lettings
Property Income – Furnished holiday lettings
Qualifying Conditions to make a letting, FHA
The property is let It is a commercial Available to the general Property is actually let for
furnished letting public for letting as holiday minimum 105 days a year
accommodation for (excluding period of long term
minimum 210 days in a occupation). In case of long term
year occupation, the property must
not be let for such occupation for
more than 155 days in a year
Long Term Occupation means letting of the property to the same person for more than 31 consecutive days
FHA – Other reliefs available
(i) Finance costs are fully deductible
(i) Cash basis - Deduction available in respect of acquisition of
plant and machinery + furniture and furnishings
(ii) Accrual basis - Capital allowances are available in respect
of plant and machinery + furniture and furnishings
(iii) Other reliefs allowed = capital gain tax rollover relief, gift
relief and business asset disposal relief
Losses made in the qualifying UK FHA business can be set off only against income from the same UK FHA business
Rent a room relief
Where gross annual rental receipts are ≤ £7,500
- Exempt from tax
- The individual’s limit of £7,500 is reduced to half
i.e. £ 3,750, if any other person also received
income from letting this accommodation Cash Basis, to
be the default
basis of
assessment
Where gross annual rental receipts are > £7,500
The individual may choose between:
✓ paying tax on the excess gross rent over £7,500
Or
✓ being taxed in the normal way on rental income
Home work
Q. 56
Thank you