This is an at a glance guide to property profits and losses. Subscribers click here for your detailed guide

At a glance

Property income

Property income derives from the activity of exploiting an interest in a property. Until 2005 it was referred to a "Schedule A" income.

A property business is not generally treated in the same way as trading activity for tax purposes, however profits are calculated on the same basis (the accruals basis).

  • From April 2017 the cash basis is the default method for unincorporated property businesses with receipts under £150,000.  Taxpayers can elect to apply the accruals basis instead.
  • A property business is a business but is treated as an investment activity for Capital Gains Tax (CGT) and Inheritance Tax (IHT) purposes.
  • Property income is not earnings for National Insurance Contributions (NICs) purposes.
  • Income tax is charged on property income arising in a tax year; accounts should be drawn up to 5 April each year.
  • Property income is subject to special reliefs: Rent-a-room relief and Replacement of Domestic Items Relief.
  • Furnished holiday letting is treated differently to property income. It is a trading activity and is subject to different rules.
  • Profits and losses made in developing or dealing in land are not taxed as property income, they are generally treated as trading activities.

Overview and examples

What’s new?

Property income: what is the basis of assessment?

The profits and losses from a property business are calculated on the same basis as those from a trade or profession.

  • From 6 April 2017 the Cash basis is the default method for unincorporated property businesses with receipts under £150,000.  Taxpayers can elect to apply the accruals basis instead.
  • Profits and losses are calculated on a tax year basis for individuals, but by accounting period for companies.
  • Partnerships have special rules.

Property losses

  • Property losses may be offset against any other property profits of the year and then carried forward against the future profits of the same business.
  • There are special rules where a loss is created by capital allowances or the business is in agriculture.

 Loss claims: Income Tax

  • Losses incurred in a year of assessment are either offset against property profits of the year, or carried forward and set against any profits of the property business for future years.
  • A loss on a property that is not let on a commercial basis is not allowable.

Loss claims: Corporation Tax

  • A property loss must first be set against the company's total profits for that accounting period. An unrelieved loss may then be:
    • Surrendered as group relief or
    • Carried forward to the next accounting period, if the property business is continuing.
  • See Losses: trading and other losses

Capital allowances

A property business is a "Qualifying activity" for the purposes of plant and machinery capital allowances, but capital allowances cannot be claimed for an ordinary property letting business consisting of the letting of a dwelling house except:

  • Furnished holiday letting (which is taxed as a trade) or as a hotel or B & B.
  • A dwelling house used as part of a qualifying trade
  • Expenditure relating to shared areas of buildings that consist of multiple self-contained dwellings.
  • When a building comprises of a number of different dwelling houses, such as a block of flats or a student hall of residence, then capital allowances may be claimed on the shared communal areas of buildings. See Can I back-claim capital allowances on residential property?

Capital allowances are not available under the cash basis, except for cars. 

Wear and tear allowance or repairs and renewals to furniture?

Up to April 2016 taxpayers could claim either:

  • A 10% wear and tear allowance or
  • The cost of providing furniture, or replacing or renewing tools as an expense.

From April 2016:

The ‘wear and tear allowance’ is replaced by the Replacement of Domestic Items Relief.

Lease premiums

  • A premium charged on a lease that does not exceed 50 years is treated as rent receivable in the year that the lease is granted, equivalent to the amount of the premium less 1/50th for each full year, minus one in the lease’s duration.
  • Lease premiums generally apply to commercial property letting.
  • See Adviser guide: Property profits and losses

Joint Property

  • Joint property is not treated as a partnership for tax unless there the owners have decided to run it as a commercial partnership.
  • See Joint Property

Deductible expenses

Property businesses may deduct expenses as long as they are:

  1. Incurred wholly and exclusively for business purposes and
  2. Not of a capital nature.

It follows that many of the allowable deductions will be on the same principles as trades.

Motor expenses: from 6 April 2017

Finance Act 2018 added the use of authorised mileage rates for landlords.

  • Mileage rates will not be available if capital allowances have already been claimed on the vehicle, or if expenditure in acquiring the vehicle has been deducted in a business using the cash basis.

Rent A Room relief

  • An individual may rent a room in their own residence, and provided the rental income does not exceed the statutory threshold (currently £7,500) the relief completely exempts the rental income.
  • Rent A Room relief does not apply if a room is rented by a business.
  • See Rent A Room relief.

VAT

Rental income is generally exempt from VAT. The owner of a commercial building may elect to tax a building (this is under option to tax arrangements).

Construction Industry Scheme (CIS)

Property investors are not required to register for the CIS unless their activities turn them into property developers.

Links:

This guide should be read with our Property profit & losses tax toolkits:

 

 

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