Property Income
For individual
Basis of Assessment of Property Income
For Individuals
Income less expenses on cash basis actually arising in the tax year
in exam assume cash basis unless specifically stated accrual basis.
Aggregate of net income from all properties except furnished holiday lettings.
Property 1
Property 2 Property 3 Total
Rental Income received X X
X XX
Less: Related expenses paid (X) (X)
(X) (XX)
Assessable Property Income X (X)
X XX
For companies
Income less expenses arising in the accounting period
On accrual basis.
Cash basis allowable deduction for
property income of individuals
Expense wholly, exclusively and necessarily for the purpose of the property
business is allowable (General Rule).
Expense related to private use is not allowable expense (General Rule).
Any revenue expenses, incurred seven years before letting commence which
would have been allowable if the letting was commenced is treated as
expense on the day that letting commence and can be deductible on the day
the letting commence (Relief for pre-trading expenditure)
Examples allowable expense of property business:
Insurance
Agents fees
Repairs
Other management expense.
Interest on loan to acquire or improve a let non-residential property
(commercial)
Question
Hembery owns a property that was let for the first time
on 1 July 2022. The rent of 5,000 per annum is paid
quarterly in advance. She paid allowable expenses
related to the property of 200 in December 2023
related to redecoration following burst pipe, and of
400 in May 2024 related to repair work which was
completed in March 2024.
1. Calculate Hembery’s property income for the tax
year 2023/24.
2. What will be the property income if Hembery is a
company?
Financing cost – Residential
Properties
Special Rule
For finance cost (including interest payable and incidental cost of obtaining finance such as bank
fee) on loan:
to acquire, improve or repair a Residential Let Property, and
to acquire assets used for Residential Letting Business.
Tax relief is given on finance costs at the basic rate (20%) by deduction from the
taxpayer’s final income tax liability.
Tax relief is not available for finance cost of the residential property where owner
lives in the property. Tax relief of 20% of finance cost is available only to let
residential property.
Note: This special rule does not apply to:
Non-residential property (for which finance cost is fully deductible from rental income)
Companies
Qualified Furnished Holiday Accommodation
Question – Finance cost for
Residential Property
Mr. X owns a residential property that he lets out. During the tax year
2023/24 he received rent of 15,000 and paid the following expenses:
Agent’s fees
2,000
Insurance
3,000
Gardener’s costs
4,000
Interest costs on loan to acquire property 8,500
During the tax year 2023/24, Mr. X also has income from business of
95,000 and bank interest of 5,000.
Required:
Calculate Mr. X Income tax liability for the tax year 2023/24.
Capital Expenditure
Cash basis – no distinction between capital and revenue
expenditure so expenditure on plant, machinery and
equipment used in the property business are allowable
deduction when paid for.
Exception: This rule does not apply to:
- Cars
- Assets used in a residential property. e.g. furniture
(instead replacement domestic item relief available).
- capital expenditure on Land and building: In
certain circumstance, non-residential building (not
land) may be eligible for structures and building
allowances.
Repair allowable but improvement is not allowable
deduction for building.
Cars
Replacement domestic item relief: For
Residential Property
Expenditure on assets use in a residential property. E.g. furniture, TV are not
allowable deduction. Capital allowances are also not available on such assets.
However, for such furnished residential lettings, a special relief, replacement
domestic relief is available.
This relief allows deduction for replacement not the original acquisition.
The allowable deduction = replacement cost less any proceeds from the disposal
of original item
The replacement cost allowed is restricted to cost of similar item excluding
improvement but allow for modern equivalent.
Only item that is used for domestic purpose such furniture, furnishing, household
appliances, carpet, curtain, TV are allowable. Fixtures such as Plant and machinery
that is fixed including boiler radiator are specifically excluded.
This relief is not available for furnished holiday letting and accommodation
for which rent-a-room relief has been claimed.
Question
Property Income – Accrual Basis
Question – Accrual basis Property
Hembery owns a property that was let for the first time on 1 July 2022. The
rent of 5,000 per annum is paid quarterly in advance. She paid allowable
expenses related to the property of 200 in December 2023 related to
redecoration following burst pipe, and of 400 in May 2024 related to repair
work which was completed in March 2024.
Required:
Calculate Hembery’s property income for the tax year 2023/24 assuming
election for accrual basis has been made.
Property Business Losses
Property business Loss arise when Rental income <
Allowable expenditure.
If landlord owns more than one property, the profits and
losses on each properties are aggregated to calculate
the assessable income for the tax year from the
property business to include in the tax calculation. This
provides instant loss relief:
If there is any loss remain after aggregation the
unrelieved loss is carried forward indefinitely and offset
against first available future property business profits.
Question- Property Business Loss
See Illustration 5 and 6 from study text
Premium received on grant of a short lease
Furnished Holiday Letting (FHA)
Profits arising form the commercial letting of furnished holiday accommodation are
assessed as profit arose from a single and separate trade.
Separate records have to be kept for furnished holiday letting as there are specific
rules and relief.
Cash basis is default basis.
Condition for letting to qualify for FHA:
1. The property is let furnished
2. Commercial basis with the intention to earn profit
3. Available to the public as holiday accommodation for not less than 210 days a year.
4. Actually let for at least 105 days a year (excluding period of long term occupation-
31 consecutive days). If owns more than one property, 105 days test is satisfied if
average days from all properties is 105.
5. The property must not be let for a period of long term occupation in excess of 155
days in a year.
Tax treatment of Furnished Holiday letting
Rent a room relief
An individual may elect to ignore the exemption for a particular year, for, example loss is
incurred when taking account of expenses. In deciding whether to elect for rent a room relief,
the key question will therefore be whether or not expenses exceed 7,500.