Chapter 15 Property Income – Further Aspects Flashcards
overseas property and FHL
Overseas property – an overseas property business is separate from the UK property business. Each businesses income is separate.
Furnished holiday lettings – income from a furnished holiday letting is still part of either UK or overseas property income, however they have certain tax benefits. A property is an FHL if all of the conditions are met:
• The property needs to be furnished
• Property must be situated in the UK or any other state in the EEA
• The property must be available for commercial letting as holiday accommodation to the public for at least 210 days in a 12-month period and must be let out for at least 105 days as holiday accommodation.
With the 105 days test an election can be made to average periods of occupation across all of the FHL owned by the taxpayer. An averaging election is made separately for UK and overseas FHL. Holiday accommodation is not met when the same people rent it out for more than 31 days.
Advantages of FHL – if a loan is taken out to purchase the property the full amount of interest is deducted from the rental income (unless property allowance is claimed instead). The taxpayer can treat the income as earned income, which means the taxpayer can made pension contributions depending on the level of their earnings. FHLs qualify for certain capital gains reliefs that normal lettings do not, these include rollover relief, gift relief and entrepreneurs relief.
FHL Losses – a loss incurred on an FHL property can be offset against other FHL properties, but not against normal property income. If an overall loss occurs on FHL properties this can be offset against future FHL income.
other FHL points, REITS
Other points FHL – replacement domestic items relief does not apply to FHLs. If the cash basis is used capital expenditure in respect of furniture, furnishings and fixtures can be deducted. If the accruals basis is used, capital allowances are used instead.
Real Estate Investment Trusts (REITs) – these are companies that invest in property and can elect for special rules to apply to their property income and to the profits they distribute to their shareholders. For UK REITs their qualifying rental income and gains on disposals of investment properties will be exempt from corporation tax. Any other profits and gains from other activities will be subject to corporation tax, however. Dividends paid by a UK REIT out of tax-exempt property income or gains will be treated as UK property income in the hands of its shareholders. Investors will be deemed to have received a UK REIT dividend under deduction of basic rate income tax. The property allowance does not apply to income from REITs. The dividends will be taxed as non-savings income carrying a 20% tax credit. If the REIT pays out a stock dividend this will also be treated as non-savings income carrying a 20% tax credit. Dividends paid out from other profits will be treated as normal dividends.
premium on leases and grant of a sub lease
Premiums on leases – the person who grants the lease is the lessor and the person whom the lease is granted to is called the lessee. If a landlord owns the freehold of the property this means the individual owns the land outright and is not leasing it from another individual. The premium on leases is taxed in the hands of the landlord as property income. If the lease is granted for a period of more than 50 years there is no income tax charge, instead this will be taxed as capital gains.
Leases of less than 5o years are called short leases, on the grant of a short lease, part of the premium received by the landlord is chargeable to income tax under property income, the other part is taxable as capital gains. To work out the amount charged to income tax you use the formula:
Premium – (2% x premium x (number of years in the lease – 1))
An alternative formula is: Premium x ((51 – number of years in the lease) divided by 50)
Grant of a sub-lease – a premium received by a taxpayer for the grant of a short lease is partly chargeable to income tax and partly chargeable to capital gains tax. However, where a taxpayer has a lease and from that lease, he grants a sub-lease, that taxpayer receives an allowance for part of the original premium paid. The calculation for this is:
Property income for landlord x length of sub-lease / length of head lease - less the amount of the original premium paid x length of sub-lease / length of head lease
