Module 4 Property income

Question 1

What is property income?

Answer 1

Income from renting out land and property or from the use of land in some way (ie, selling fishing permits to anglers is land income)

Question 2

Overseas and UK property income should be separately recorded?

Answer 2

True - All UK property income can be treated as being from a single rental business and likewise for overseas property

Question 3

When is property income calculated on the cash basis?

Answer 3

When the gross income does not exceed £150,000 for the fiscal year. (if rental is carried on for part of the year, the limit will be reduced accordingly)

Cash basis - income and allowable expense are recognised when money is received/paid

Question 4

When is property income calculated on an accrual basis?

Answer 4

When the gross income exceed £150,000 for the fiscal year. (if rental is carried on for part of the year, the limit will be reduced accordingly)

Accural basis - income and allowable expense are recognised when money is receivable/payable (calculate to the nearest month)

Question 5

When can an accrual basis for property income election be made?

Answer 5

Must be made on or before the first anniversay of 31 January following the fiscal year for which the election is made (For 2019/20, this will be 31 January 2022)

This needs to happen year on year otherwise cash basis is default

Question 6

When can expenses be deducted from property income?

Answer 6

When they are incurred wholly and exclusively for the purpose of the property business:

Advertising
Cleaning
Maintenance
Insurance
Council tax/water rates
Letting agent fees
Repairs of items (not improvements)
Accounting costs
Bad Debts (if all reasonable steps taken to recover)
Mortgage Interest

Question 7

What is the rule on mortgage interest tax relief for property income?

Answer 7

Individuals will receive a basic rate tax reduction (20% reducer) from their income tax liability at the lower of 20% of

The mortgage interest costs
OR the property business profits

2018/19 - 50% interest cost is tax reducer and 50% is deducted from property income

2019/20 - 25% interest cost is tax reducer and 50% is deducted from property income

2020/21 - basic rate tax reducer only

This applies to UK and overseas residential property income. Non residential is deductible in full.

Question 8

In what situations are expenses deductable for property?

Answer 8

When it is tenanted and when it is empty (not occupied by owner)

If occupied by owner, then the expenses must be proportioned to only the expenses relating to the rental.

Question 9

What are the rules for property income allowance?

Answer 9

If property income is less than £1,000 (before expense deduction) then no tax is paid.

This rule can be elected to not apply (loss making properties can gain benefits)

Question 10

What are the two basis for property income allowance if income is greater than £1000?

Answer 10

Normal basis - deduct the actual expenses incurred from income received

The alternative basis - elect to deduct the allowance from the income received (beneficial if allowance greater than expenses)

Question 11

What is capital expenditure relating to property?

Answer 11

Money spent on acquiring or maintaining fixed assets such as property, plant and equipment

Cost of replacing free standing white goods such as washing machines, fridges or cookers will also be treated as capital expenditure

Question 12

What is revenue expenditure relating to property?

Answer 12

Money spent on general running costs or consumables such as repairs, insurance, heat and light.

Question 13

Can capital expenditure be deducted from property income?

Answer 13

Generally no, no deductions can be made when calculating property income.

Exceptions:

Residential property is done through replacement domestic items relief instead

Question 14

Can repairs/replacing fixtures be deducted?

Answer 14

Yes

Question 15

Cash basis - cost of furniture and fixtures in commercial property can be deducted - True or False?

Answer 15

True

Question 16

Cash basis - Residential property can claim capital expenditure tax relief - True or false?

Answer 16

False - they will need to claim from the replacement of domestic items relief.

Question 17

What is capital allowances? (only for commerical property, and Furnished holiday lets not for residential accommodation)

Answer 17

Capital allowances are a form of tax deduction for capital expenditure against profits and are calculated as a fixed percentage of the value of qualifying expenditure (6% to 100% depending on type of asset and timing of expenditure) - Plant and machinery, vehicles, tools, ladders, computers, business furniture, lifts, central heating, air conditioning.

Question 18

What is replacement of domestic items relief?

Answer 18

Available to residential landlords under either cash or accrual basis and a deducation on income calculated as:

The cost of replacing new item

MINUS the cost of any element of improvement compared to the old item (beyond nearest modern equivalent)

MINUS any proceeds of sale of the old item

PLUS any costs of disposing of the old item

Question 19

What items does replacement of domestic items relief apply to?

Answer 19

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

Question 20

Replacement of domestic items relief does not need to be apportioned for landlord occupation periods - True or False?

Answer 20

False - the cost need to be apportioned to take account of private use

Question 21

What are the advantages that applies to furnished holiday letting?

Answer 21

Profits from FHL are treated as earned income and qualify as UK earnings for pension purposes

Plant and machinery capital allowances are available on the furnishing and fixtures used within the property (instead of replacement of domestic items relief)

A number of capital gains tax relief are available when bought or sold

Profit/Loss from UK or EU FHL must be kept separate and losses from one can only be set off against profits from the same business.

Question 22

What conditions need to be met for a property to be FHL?

Answer 22

Property must be furnished and let on a commercial basis with a view to profit:

Availability condition: Accommodation must be available for commercial letting as holiday accommodation to the public for at least 210 days

Letting condition: the property must be commercially let as holiday accommodation for at least 105 days in the relevant period (multiple FHL can be averaged to reach this UK/EEA are separate)

Pattern of occupation condition: During the relevant period, no more than 155 days fall during periods of longer term occupation (continuous period of more than 31 days by the same occupier)

Question 23

What is the relevant period for a FHL?

Answer 23

Generally the tax year unless letting commenced during the year or has ceased during the year. In these cases, the relevant period is either the first or last 12 months of renting respectively.

Question 24

What is the rent a room scheme?

Answer 24

This applies when an individual lets out furnished accommodation in their own home, this can include the provison of meals, cleaning or laundry.

£7,500 of income can be tax free (limit is per house not per individual)

Question 25

Can the property income allowance and rent a room scheme both be used?

Answer 25

No, generally the rent a room scheme will provide more generous relief than the property income allowance

Question 26

Under the rent a room scheme, if income is less than £7500 what are the options available to an individual?

Answer 26

They can accept the scheme or elect to disapply the scheme (if property is loss making)

Question 27

Under the rent a room scheme, if income is more than £7500 what are the options available to an individual?

Answer 27

They can accept the normal basis or elect to apply the scheme limit to their expenses (alternative basis), this is beneficial when scheme limit is greater than property expenses.

Question 28

What is a lease?

Answer 28

Lease is a right to use an asset (in this module it is land or property) for a specific period of time

Question 29

What are the two transaction in respect of leases?

Answer 29

Grant - when the landlord originally creates the lease with the tenant (when a lease is granted to a tenant, they may pay a lump sum up front sum called a lease premium)

Assignment - when the tenant sells or transfers an existing lease to someone else

Question 30

What is a long lease and short lease?

Answer 30

Long lease is more than 50 years (entire premium is treated as a capital receipt and CGT rules apply) and short lease is less than 50 years

Question 31

How is lease premium treated in short leases?

Answer 31

Part of the premium is treated as rental income (taxable in full in the year of receipt) and the other part is treated as a capital receipt

Question 32

What is the formula to calculate tax payable on lease premium?

Answer 32

Lease premium * (50 - Y) / 50

Y = complete years of lease minus 1 year

Question 33

Can tenant claim back some of the lease premium?

Answer 33

Yes, the amount of the premium treated as rental income for landlord can be deducted by tenant when calculating their tax adjusted trading profits.

The tenants deduction is spread over the life of the lease.

Question 34

What are the rules on property losses?

Answer 34

Landlord can pool the profit/loss of all UK property together to arrive at a net profit/loss for tax purposes. This is the same for overseas properties.

UK property profit/loss cannot be set against overseas property income and vice versa.

Property losses can be carried forward to offset against future property income from the same jurisdiction

Question 35

What is the rule for non commerical rent?

Answer 35

A property let under non commercial terms (to a relative/friend at a peppercorn rent) expenses will only be allowed up to the amount of the rent, this means a loss cannot be created.