Chapter 14 – Introduction to Property Income Flashcards
Property income and allowable expenses
Property income includes rental income and premiums on leases (a lease is the right to occupy land for a specified period of time, you can rent this lease for a premium). Property income calculations are prepared for a tax year (6 April to 5 April). The income is calculated on the cash basis where gross property income does not exceed £150,000 for the tax year, otherwise the accruals basis is used. If the business is only carried for part of the tax year the £150,000 limit is proportionally reduced. You can elect to use the accruals basis over the cash basis however, which must be made by 31 January 2022, for this tax year.
Where spouses and civil partners jointly own property and the income is default split equally, the same basis of calculation must be used. They can either both use the cash basis, or both use the accruals basis.
Allowable Expenses – these are deducted when calculating the property income profit. Only allowable if the expenses are wholly and exclusively for the business of the letting. These include agents fees and commissions, repair expenses, water charges or council tax paid by the landlord, insurance premiums paid by the landlord. When landlords use a car to let properties relief is available for this, relief is also available for interest paid on loans to purchase rented properties.
Motor expenses and revenue v capital expenditure
Motor Expenses – when motor vehicle is used in a property business a landlord can deduct the proportion of actual motor expenses that relate to the business (including capital allowances) or deduct a flat rate expense for business miles travelled. The flat rates are 45p per business mile for the first 10,000 business miles and then 25p after. The flat rate expense covers the costs of buying, maintaining the vehicle, fuels and insurance, it does not cover incidental expenses such as parking fees, the landlord can have additional expenses for these if they are incurred for business reasons.
Once the flat rate has been chosen it must be claimed consistently year after year. No actual expenditure of capital allowances can be claimed in relation to that vehicle.
Capital v Revenue Expenditure – capital expenditure results in an asset and is generally not deductible. Revenue expenditure is an expense and is usually deductible. Expenditure which enhances the property is capital and repairs are revenue.
Capital expenditure Plant and machinery – under accruals basis, capital allowances may be claimed in respect of capital expenditure used in a property business. Under the cash basis relief for capital expenditure is given by deducting the cost of the asset when it is acquired. The exception is with cars, even under the cash basis the cost of the car cannot be deducted, and capital allowances may be claimed. There is no relief for domestic items (furniture) provided for use in a residential property under the cash or accruals basis, the exception to this is for a furnished holiday letting.
replacement domestic items relief and relief for interest
Replacement Domestic Items Relief – relief can be claimed for the cost of replacing domestic items used in the property. When the replacement is an improvement, the deduction is limited to the cost of an item that would have been considered the same. The amount of the allowable deduction is reduced by any amounts received on the disposal of the item. However, relief is available for incidental expenditure incurred on disposing of the old item or purchasing the new item. This relief is not available where the property is a furnished holiday letting or where rent-a-room relief is claimed, also not available where there is an element of private use.
Relief for Interest – relief is available for the interest paid on a loan to purchase a property, provided the loan is wholly and exclusively in relation to the let property. Where the property is a commercial property or a furnished holiday letting the interest is deductible in full when arriving at the property income. Interest in respect of residential properties work differently. In 17/18 100% is deductible this then reduces to 50% in 18/19, 25% in 19/20 and 0% from 20/21. The remaining percentages is only eligible for basic rate tax relief (@20%) and is given as a reduction in arriving at the individual’s income tax liability. In a tax year relief at basic rate is available on the lower of:
• The eligible interest not allowable as a deduction
• The property income for the year less property losses brought forward
• Adjusted total income, which is net income less savings and dividend income less the personal allowance
property business losses, nominal leases, rent a room relief and property allowance
Property Business Losses – profits and losses on all properties in a year are pooled together to give an overall profit or loss. If they receive a loss, then you insert a nil figure in the property income line in the income tax computation. The loss can be carried forward and set against property income from the UK property business in future years.
Nominal leases – this is when the landlord does not charge the tenant a full market rent for the use of the property. The rents received under this lease is taxable, but expenses incurred are only allowable up to the maximum of the rents, these properties cannot show a loss in the tax computation.
Rent-a-room relief – this is when an individual rent a room in their house and receives income. You can include the rent in property income and then apportion expenses. However, you can use rent-a-room relief, which for the 19/20 tax year is £7,500, which is deducted from the income. Where gross rents are less than £7,500 the relief automatically applies, and the income is not taxable. Where gross rents exceed £7,500 a claim must be made for rent-a-room relief to apply. The relief is per property and not tenant, if the property is jointly owned half the limit is given to each individual and the relief does not affect the availability of principal private residence relief when you sell the property.
Property allowance – a property allowance of £1,000 per year is available in respect of property income, if property income does not exceed this, it is not taxable, and you do not need to notify HMRC. An election can be made to not apply the property allowance and deduct expenses instead, this is beneficial when expenses are over £1,000. The elections must be made before the first anniversary of 31 January following the tax year. If the property is owned jointly, it is only the individual’s share of the gross property income which is considered.
