How do you tax property income? How to tax rents? What deductions can you claim for a property business? How do you claim tax relief for losses on property business? What happens if you are dealing or developing UK property?

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This is a freeview 'At a glance' guide to property profits and losses

At a glance

Property income

'Property income' describes income that arises from exploiting an interest in a property. Typically, property income is rental income.

A property business is not treated in the same way as a trading activity for Income Tax purposes. 

Property income: what is the basis of assessment?

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

  • The Cash basis is now 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 same rental business in the year and then carried forward against the future profits of that same business.
  • There are special rules where a loss is created by capital allowances or the business is in agriculture. See Adviser guide: Property profits and losses

 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.
  • There may be restrictions to loss relief if the property is not let on a commercial basis. 

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 used various different ways.

Capital allowances

A property business is a "Qualifying activity" for the purposes of Plant and machinery capital allowances, but capital allowances claims are restricted for the letting of a dwelling house except in certain circumstances:

Capital allowances are not generally available under the cash basis, but some assets may qualify. See Adviser guide: Property profits and losses. 

Replacing furniture and appliances?

The ‘Wear and Tear Allowance’ has been replaced by the Replacement of Domestic Items Relief (RDI).

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 RDI relief will be given for 'domestic items' which include:

  • Moveable furniture such as beds and free-standing wardrobes.
  • Furnishings such as carpets, curtains and linen.
  • Household appliances such as televisions, fridges and freezers.
  • Kitchenware such as crockery and cutlery.

Relief is not given for fixtures including integral features.

Lease premiums

Joint property

  • Jointly held 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 for more details 

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 for trading business. See What expenses can I claim?

Motor expenses

Finance Act 2018 added the use of authorised mileage rates for landlords but with certain restrictions.

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.
  • See Rent A Room relief.

Profits from dealing in or developing UK land

Property development is a trading and developers should register their business for Income or Corporation tax.

  • The Profits from dealing in or developing the UK land rules are anti-avoidance rules that are applied if a development or dealing profit is treated as capital to avoid tax. 
  • When the rules apply Income Tax (individuals) or Corporation Tax (companies) apply to profits.
  • Any profits already taxed in the UK will not be taxed again (i.e. there should be no double taxation).
  • Non-resident companies and individuals who are dealing in or developing land should notify their chargeability and register to pay tax.

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).

VAT on construction is covered in our guide VAT & Land and Property

Construction Industry Scheme (CIS)

  • Property investors are not required to register for the Construction Industry Scheme CIS unless their activities turn them into property developers.
  • Property developers will need to review their obligations under the CIS if they are engaged in construction operations and engaging labour.

Capital gains

An individual making a profit or gain on the disposal of the freehold or a leasehold interest in property is subject to Capital Gains Tax.

A company making a profit or gain on the disposal of an interest in property is subject to Corporation Tax.

Capital Gains Tax reliefs

Disposal of your home or second home

  • Private Residence Relief (PRR) gives you relief from Capital Gains Tax on the disposal of your home. This relief is automatic providing you meet all the qualifying conditions. 
  • Lettings relief is a further relief from Capital Gains Tax if you have let out your home.
    • If you are letting a property, privately or via airbnb you may cease to qualify for lettings relief from April 2020.
  • See Private Residence Relief: At a glance

Disposal of a property 

Useful guides on this topic

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


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