1. TC - Property Income Flashcards
How is basic property income calculated?
Income and exp from diff properties are pooled together into a single working
Rental income received x
Less allowable rental exp paid (x)
= Property income assessment X
What type of income is property income?
What % tax is there?
Non-savings income
20% basic £37,500
40% higher £150,000
45% over
Does property income get taxed on accrual basis or cash?
Cash basis is default for property income from land and buildings
But indiv witth rental receipts exceeding threshold for joining cash basis must calc on accruals basis (£150k)
Or if below this threshold can opt to use accruals basis - but in exam assume cash unless told otherwise
Give some examples of allowable deductions for property income tax callcs
- Insurance (e.g. buildings insurance)
- Finance costs (e.g. mortgage interest, but there are restrictions)
- L&P e.g. agent’s fees
- Rates and taxes paid by landlord e.g. council tax/water rates
- Ancillary services provided by landlord .g. cleaning/gardening
- R&M e.g. painting and decorating
- Fixed rate deductions for MV used in property business
What must you be careful bout when calculating allowable expenses for property income tax calcs?
- The exp is allowable
- Does it need time apportioning? E.g. can only claim if it was rented/available for rent
i. e. time restrict if landlord in property in tax yr
When are property allowances available for P&M?
Available only on P&M used for repairs, not furniture
When can capital allowances NOT be claimed for cars?
CAN’T be claimed for vehicles for which a fixed rate deduction has been claimed
Is there any replacement furniture relief for property income tax calcs?
No relief for initial purchase of furnishings
E.g. beds/fridges etc
ONLY cost of replacing them later is allowable, even if the property is not fully furnished
When is the replacement furniture relief reduced/increased?
Reduced by any proceeds from the sale of an asset being replaced
Increased by any costs of disposal of the old item
BUT old item must not be available for use by the tenant
When is replacement furniture relief available?
For like for like replacement
NO deductions for any element of replacement
Give an example of when part replacement furniture relief could be given
If a washer was replaced with a washer dryer, only the replacement washer would qualify
What is the exception to the replacement furniture relief rule of like for like replacement?
If expenditure on a replacement asset is purely because of advances int technology then it is allowable in full
How are fixtures treated as capital expenditure in properties? (i.e. when it is allowable?)
Allowed deductible expense if replacing fixtures that are
- integral to the property
- not normally removed if sold e.g. sanitary ware, light fittings, boilers
What portion of mortgages are and are NOT allowed?
NOT allowed EVER: the capital element of the mortgage repayments
Allowed tax relief for landlords of FINANCE part of cost (but restricted to basic rate of income tax)
NOTE: this restriction is being phased in, and is fully in place in 20/21
What is the change being made to finance costs as an allowable expense for property income?
A restriction is being phased in on the finance element to the basic rate of income tax
Fully in place by 20/21
in 19/20 25% of finance costs are deductible from property income as allowable expenses
The rest available at basic ate (20%) reduction at the bottom of the income tax comp
How is the reduction calculated for the finance costs for property income?
It is calculated as the lowest of:
- Finance costs: costs not deducted from rental income in the tax year + fin costs b/f
- Property business profits: the profits of the property business in the tax year (after using any b/fwd losses)
- Adjusted total income: non-savings income (after losses and reliefs) after deducting the personal allowance (£12,500 in 19/20)
If the lowest = property bus prof/adj total income then the diff between that figure and finance costs is carried forward to calc the basic rate tax reduction in following years
Tax reduction can’t be used to create a tax refunds
TYU3: S has employment income of £25,500 per year
During 19/20 TY, received £11,000 of rental income from residential property and incurred the following costs:
Mortgage int £8k
Garden maintenance £500
New conservatory £4,300
Calc S’s income tax liability for TY 19/20
Employment income £25,500 Property income(W1) = £8,500 Net income = £34,000 Less PA (12,500) Taxable income £21,500
Income tax
Non-savings basic rate £21,500 * 20% = £4,300
Reduction for remaining fin costs (W2) (6,000 * 20%) = £(1,200)
Total = £3,100
W1 Property income Rental income £11,000 Fin costs (£8,600 * 25%) = £(2,000) Garden maintenance £(500) New consev (capital) £0 Property income = £8,500
W2 Tax reduction for remaining fin costs
Tax reduction is 20% of the lowest of
Fin costs not deducted (£8k * 75%) = £6k
Property income = £8.5k
Adjusted total income exceeding PA = £21,500
Lowest = 6k available at 20% basic tax rate
How can the property allowance be deducted?
It can be deducted from gross rental receipts for the tax year rather than deducting any property expenses
What process is there for if the rental receipts are not more than the property allowance?
PA = £1k
Property allowance automatically applies and income will be nil (CAN’T CREATE LOSS)
(This is the default assumption in the exam)
Taxpayer can elect for the allowance not to apply and instead deduct actual expenses (i.e. if this would create a loss)
What process is used if rental receipts are above the property allowances?
Taxpayer can elect to deduct the allowance from gross income instead of allowable expenses (where the allowable exp are under £1k)
- In the exam, state whether using the allowance or the actual expenses would be preferable, and prepare your calc accordingly
How are property losses treated?
i.e. total exp > total icnome
Income from property in IT comp = NIL
Loss is carried forward against first available future income from property
TYU4: a
Explain whether the following indiv should use the property allowance,
whether the treatment will be auto or by election
and calc their taxable property income
Rents received: £900
Expenses: £200
Rental income is below £1k So automatically receives the property allowance Rent received 900 Actual exp - Property allowance (1000)
Effect = 0 as can’t make it a loss
TYU4: b
Explain whether the following indiv should use the property allowance,
whether the treatment will be auto or by election
and calc their taxable property income
Rents received: £750
Expenses: £950
Automatically receives property allowance
But should elect to be treated on normal basis as she has an allowable loss to carry forward
Rent received 750
Actual exp (950)
= taxable income (200)
TYU4: c
Explain whether the following indiv should use the property allowance,
whether the treatment will be auto or by election
and calc their taxable property income
Rents received: £3,400
Expenses: £850
Has rental income over £1k so won’t receive property allowance automatically
But exp are less than £1k so she should elect to receive the property allowance instead of deducting her expenses
Rent received £3,400
Actual expenses -
Property allowance (1,000)
Total taxable income 2,400
TYU4: d
Explain whether the following indiv should use the property allowance,
whether the treatment will be auto or by election
and calc their taxable property income
Rents received: £5,600
Expenses: £2,100
Taxed on normal basis automatically and shouldn’t elect for diff treatment as his expenses exceed £1k
Rent received 5,600
Actual expenses (2,100)
Property allowance 3,500
When can’t an indiv claim property allowance?
How does that affect the tax comp
Can’t claim the property allowance on income qualifying for rent a room relief
So income qualifying for rent a room relief isn’t included in the rental income figure used to determine if the income exceeds the property allowance
What happens relating to rent a room relief when there are 2 or more people sharing a home?
When 2 or more people share a home each has rent a room relief of £3,750 (£7,500/2)
EVEN if there are 3 or more co-owners
What does REIT stand for?
Real Estate Investment Trust (REIT)
What is REIT?
A REIT is a company that invests in a number of properties
How are REITs taxed?
Income received from properties owned by a REIT and gains made on the disposal aren’t taxed in the hands of the company (i.e. they are tax exempt)
Other income generated by the REIT e.g. div income/interest is taxable on the trustees
TYU5: M lets out a room in her hose at a rent of £150/week received in advance
Her allowable expenses paid were £7,550 for the TY 19/20
Show whether Montana should elect to use the rent-a-room rules
Normal income rules
Rent received £150 * 52 = £7,800
Less: expenses paid (7,550)
Taxable property income £250
Rent a room rules
Rent received £7,800
Less rent-a-room limit £(7,500)
Taxable property income = £300
M shouldn’t make rent-a-room election as taxable property income is lower under the normal rules
How are REITs taxed?
Income received from properties owned by a REIT and gains made on the disposal aren’t taxed in the hands of the company (i.e. they are tax exempt)
Other income generated by the REIT e.g. div income/interest is taxable on the trustees
When the income is distributed to investors it will be subject to income tax as follows:
- Tax exempt: taxable as property income paid net of basic rate tax (20%)
- Other income (non-tax exempt): taxable as dividends
Gains on disposals of shares held in the REIT are subject to the normal CGT rules
What does AIF stand for?
Authorised Investment Fund
What is an AIF?
A fund with an investment portfolio that consists mainly of real property or shares in UK REITs
What is the tax treatment for AIFs?
The AIF is exempt rom tax on rental profits and certain other property related income
When income is distributed to the investors it will be subject to income tax as follows:
- Distributed as property or interest income: paid net of basic rate tax (20%) and taxable as property or interest income
- Distributed as dividend income: taxable as dividends
Does REIT and AIF income qualify for property allowance?
NO
TYU1: Joan owns a property which was let for the first time 1 July 2016
Rent for y/e 30 June 2019 was £15k and paid monthly in adv on the first day of the month
1 July 19 the annual rent was increased to £17k and Joan paid her letting agency fees on the same day
Joan paid ins of £1k for the y/e 31 Dec 19 (paid in full 1 Jan 2019) and £1,400 for y/e 31 ec 2020 (paid 1 Jan 2020)
Calc Joans taxable property income for TY 19/20
Rent paid
May 19- June 19 = £15k * 2/12 = £2,500
July 19 - April 20: £17k * 10/12 = £14,167
Total income = £16,667
Less: Letting agent fees (paid 1 July 19) £(2)k
Ins (paid 1 Jan 2020) £(1,400)
Total exp = £(3,400)
Taxable property income = £13,267
TYU2: Frank lets out a cottage at weekly rent of £150 payable in adv
During summer, he lived in the property for 8 weeks.
He paid the following expenses:
Ins £480
Replacement cooker £585 (sold old cooker for £100 and is not reflected in £585)
Council tax £650
Water rates £240
Advertising for new tenant £300
Cleaning (tenanted periods only) £750
Calc Frank’s taxable property income for TY 19/20
Income Rent received (52-8)*150 = £6,600
LEss expenses Allowable in full Cleaning £(750) Advertising £(300) Replacement cooker (£585-£100) £(485)
Allowable for let period
Insurance (£480 * 44/52)
Council tax (£650 * 44/52)
Water rates (£240 * 44/52)
Total expenses = £(2,694)
Taxable property income = £3,906
