Property Income (OLD)

Question 1

Knowledge Criteria: What to know?
1) Demonstrate understanding of what should be declared as property income

Answer 1

1) any rent or receipts received in exploiting their interest in land or property. May be IT or CT dependant on the business structure and residency. May be a single property business or multiple again dependant on structure and residency

2) How it is calculated,
3) General allowable deductions
4) How it is returned for tax purposes.

Note: Generating income on property is not the same as the person generating income from the land itself, such as by farming it

Question 2

Who can carry on a property business?

Answer 2

Anyone:

• an individual
• a partnership
• a trustee of a trust
• a personal representative
• a company.

The legislation is in sections 264 to 265 ITTOIA05 and sections 204 to 206 CTA09.

Question 3

What is:
1) Freehold interest

Answer 3

1) Outright ownership of a property and land it stands on

Question 4

What is:
1) Leasehold
2) Sub-Lease
3) Head Lease

Answer 4

1) Tenant has a fixed term of possession of the land or property
2) tenant of a tenant
3) The first lease between the landlord and tenant is called the head lease

Question 5

What is:
Commonhold

Answer 5

Owning property divided into separate parts like flats/ offices

Question 6

Define: What is property income?

Answer 6

property income arises when a person **exploits their interest **in land or property **and receives rent **or other receipts.

That is not the same as the person generating income from the land itself, such as by farming it

Refer here to sections 266 ITTOIA05, 207 CTA09 and PIM1051.

Question 7

1) What falls within rent?
2) What falls outside of rent?

Answer 7

1) * regular payments by a tenant
* payments to the landlord for repairs and maintenance
* ground rents
* other payments for the use of lan

2) Selling of land = CGT
Selling of leases >50 years = CGT

Question 8

Which of the following incomes do you think is property income?

• Candy Limited sells a property for £350,000.
• Mary hires her large garden out to a wedding party for a single payment of £2,000.
• Sandy owns a block of offices which he rents out for total annual receipts of £500,000.
• Arthur owns a farm. He has a tenant who rents three fields at £1,000 a month.
• Simon has a smallholding. He makes money by selling the vegetables he grows at the local farmers market.

Answer 8

• Candy Limited sells a property for £350,000. NO - CGT
• Mary hires her large garden out to a wedding party for a single payment of £2,000. PROPERTY INCOME
• Sandy owns a block of offices which he rents out for total annual receipts of £500,000. PROPERTY INCOME
• Arthur owns a farm. He has a tenant who rents three fields at £1,000 a month. PROPERTY INCOME
• Simon has a smallholding. He makes money by selling the vegetables he grows at the local farmers market. NOT PROPERTY INCOME - THIS IS FARMING

Question 9

What is a property business?

Answer 9

A property business includes all businesses and transactions a person or company enters into that generate income from land.

The legislation is at section 264 ITTOIA.

Question 10

Is property rental treated as a business?

Answer 10

Yes.

If the property is in the UK, it does not matter whether the landlord lives in the UK or abroad, as they have a UK property business.
The legislation states that
* a person’s UK property business consists of every business which the person carries on for generating income from land in the UK, and
* every transaction which the person enters into for generating income from land in the UK.

Therefore
* even a single, one-off receipt for letting someone else use your land is treated as a property business
and
* all income from land in the UK is treated as a single business.

UPI Page 13

A company’s UK property business is defined in the same terms.
Sections 264 ITTOIA05 and 205 CTA09 apply.

Question 11

Charges to Tax: where are they?
1) Individual + UK resident
2) Individual + Not UK resident
3) Company + UK resident
4) Company + Non UK resident

Answer 11

1) profits from both their UK property business and overseas property business are charged to income tax.
2) Only profits UK property business are charged to income tax.
3) The profits of a company’s UK or overseas property business are charged to CT if the company is UK resident
4) Non-resident companies are charged to income tax on their UK property business profits unless they carry on a trade in the UK through a permanent establishment. If any property owned by the permanent establishment generates property income, then the non-resident company is charged to CT on those profits.

Question 12

Single or Multiple Property businesses.
1) What does it depend on?
2) Why does it matter?

Answer 12

1) In what capacity are they? ie are they a trustee for one, and not the other, or one is abroad then this is 2 separate property businesses
2) All income and expenditure arising in a single property business is pooled, no matter which property it arises from. if one property in a property business makes a loss, and another property in the same property business makes a profit in the same year, the loss is pooled with the profit.

Example

Rupert has the following properties which he rents out.

• A house he inherited and which he lets to a family.
• A row of lock up garages he purchased, which he rents out for storage.
• Half of the large garden attached to his own home, which he rents to the local allotment society.
• A property in Florida which he rents out to an American family.

For his UK properties, Rupert is treated as having one UK property business because he is acting in the same legal capacity for all of them and they are all based in the UK. He has a separate overseas property business for his house in Florida.

If Rupert had acted in a different legal capacity for any of the UK properties, he would be treated as having separate UK property business for each.
Suppose Rupert had not inherited the house. Instead, it was put into a trust when the owner died, and Rupert was appointed as trustee. If, acting in his capacity as trustee, he rented the house out, he would have two UK property businesses.

He would have one business for the house and another business for the garages and half his garden.

He would still have his house in Florida, which forms an overseas property business.
The same rule applies to companies and their property businesses.

A company could invest in UK property through a partnership and also have letting income in its own right. This would result in two separate UK property businesses.

Question 13

New Business or same?

Jim owned four houses near Readstone university and rented them to students. He carried out all the maintenance and decoration himself and had enjoyed that but, after doing it for many years, he realised that the work needed each summer to bring the properties back into a decent state of repair was becoming too much for him. In June 2016, he decided to give it all up and sold the houses to a property company.
Jim enjoyed doing little for a while but, by the summer of 2019, he was getting restless so bought two small office blocks that he rented out on long-term leases to established companies who were responsible for managing their own repairs.
Had there been a cessation of Jim’s property business?

Answer 13

In this case, HMRC would probably treat this as a cessation and re-commencement.
Different properties are involved, the type of tenant and lease terms differed and there was a gap of around three years.

Note:

Commencement of a property business
A property business usually starts when the person who has an interest in the property enters into the first transaction, which exploits their interest and will generate receipts of some sort.

Ceasing
Where a property business consists of letting property, it normally ceases, OR
Non-business use, OR
3 years + dormancy OR
substantially altered (eg from non-residential to residential

Question 14

What is the basis of assessment for property business profits for the following?
* Freddy Fish Limited.
* Thelonious Wholesale Fish Partnership.
* Fred Fish Plumber.

Answer 14

The basis of assessment is
* Freddy Fish Limited – accounting period.
* Thelonious Wholesale Fish Partnership – trading partnership so follows the partnership period of account.
* Fred Fish Plumber – 6 April to 5 April.

Question 15

Property Income: Exceptions to Cash Basis?

Answer 15

Will use GAAP Accruals when:
1) Property business ran by company/LLP/Trustee/Corporate firm
2) Receipts are >£150,000 per tax year (apportioned if less than a tax yer)
3) Business premises renovation allowance has been claimed
4) They make an election to use the accruals basis and election made within one year of the filing date for the tax year.
5) Before 2017/18

corporate firm is a partnership with at least one non-individual member

Question 16

What is:
1) Cash basis
2) GAAP Accruals
3) Difference?
4) Example of GAAP for rental income

Answer 16

1) income has been received and expenditure paid in the tax year
2) Receipts and income recognised when it was earned/incurred regardless of whether it has been received/paid

Record keeping under the cash basis much simpler. Instead of having to prepare a balance sheet and profit and loss account, the property business records need only show money when it actually comes in or goes out.

Question 17

Cash basis and GAAP Accrual difference:

Scenario:
John began letting out a property on 1 July 2017 for £16,000 per year payable half-yearly in advance on 1 July and 1 January. He receives rent of
* £8,000 on 1 July 2017, covering the period 1 July 2017 to 31 December 2017
* £8,000 on 1 January 2018, covering the period 1 January 2018 to 30 June 2018.

Answer 17

Using the cash basis, he recognise property income of £16,000 in 2017/18 as both payments were received in that tax year.

Under GAAP John would have to apportion the rent received on 1 January 2018 to the periods for which it was earned.

Question 18

Gurjit owns a commercial property, which he leases to a local business for a premium of £30,000 and rent of £100,000 per year.
Which of the follow items of expenditure can Gurjit claim as a deduction under the cash basis? Explain the basis of your answer.
1. Lease premium £30,000
2. Carpeting £3,500
3. Window blinds £10,000
4. External security door shutters £4,500
5. Fire doors £9,000

Answer 18

1. Lease premium £30,000 is not a deduction.
   Legislation specifically excludes a deduction for lease premiums.
2. Carpeting £3,500 is a deduction.
   This is a depreciating asset with an expected life of less than 20 years so Gurjit can claim a cash basis deduction.
3. Window blinds £10,000 are a deduction.
   This is a depreciating asset with an expected life of less than 20 years so Gurjit can claim a cash basis deduction.
4. External security door shutters £4,500 are not a deduction.
   Legislation specifically excludes a deduction for shutters.
5. Fire doors £9,000 are not a deduction.
   Legislation specifically excludes a deduction for doors.
   Next, the transitional arrangements for the cash basis.

Question 19

What are the conditions for Domestic Items Relief?

UPI Chapter 4

Answer 19

Condition A
The individual or company claiming relief must carry on a property business that includes letting a dwelling house.
Condition B
The old domestic item that was use in the dwelling house must be no longer available for use by the tenant and be
* replaced with the purchase of a new domestic item, and
* it is provided for the exclusive use of the tenant.
Condition C
The expenditure on the replacement item must
* meet the wholly and exclusively rule, and
* be excluded by the capital expenditure rule.
Condition D
The capital allowance must not have been claimed on the replacement domestic item.

Question 20

1) Is Capital Expenditure allowable in cash basis property income?
2) What else might be available?

Answer 20

Yes - cash basis allows a property business to claim a deduction when calculating its profits or losses, for capital expenditure

• incurred on a depreciating asset, being an asset with an expected life of 20 years or less
• that is not used in connection with the:
  provision, alteration or disposal of land,
  cars,
  financial assets,
  the business
  education and training

unless
* it is an ordinary residential property business that gets relief for capital expenditure through the replacement domestic items scheme.

he cash basis allows a property business to claim a deduction when calculating its profits or losses, for capital expenditure
* incurred on a depreciating asset, being an asset with an expected life of 20 years or less
* that is not used in connection with the provision, alteration or disposal of land, cars, financial assets, the business, or education and training
unless
* it is an ordinary residential property business that gets relief for capital expenditure through the replacement domestic items scheme.
2.3 Capital Expenditure
Under the general rules for calculating profits and losses, expenditure is allowable as a deduction only if
* it is incurred wholly and exclusively for business purposes and
* is not capital expenditure.

2.3.1 Capital expenditure allowable as a deduction
Under the cash basis, certain property businesses can claim deductions for capital expenditure incurred on depreciating assets.
For these purposes, a depreciating asset is
* an asset with
o an expected life of 20 years or less or
o a negligible value after that time. A negligible value is 10 % or less of the original value when the asset was acquired.
* that is not used in connection with
o the provision, alteration or disposal of land
o cars
o financial assets
o the business itself or
o education and training.

Question 21

Need to understand basic rate reducer, eligibility

What are the changes to loan interest rate and finance charges: Basic rate reducer and eligibility

Answer 21

eligibile if wholly and exclusively
can claim full relief on commercial propertiers
tax deduction basic rate reducer

Question 22

When does a property business cease?

Answer 22

TBC
Moves from business to non-business (eg. moved into the property)

Question 23

Furnished Holiday Lets - how are these treated?

Answer 23

TO BE CONFIRMED
Do they pay NI?