Topic 4- Property Income

Question 1

What are the list of allowable expenses paid in property income (wholly and exclusively)?

Answer 1

✓ Insurance
✓ Agent fees and other management expenses, council tax

✓ repairs /replace/ renewal / redecorate
✓ motor vehicle running costs and capital allowances or approved mileage allowance (45p)
✓ Interst paid for non-residential property is an allowable deduction
✓ Interest on a loan to acquire or improve a RESIDENTIAL property. 25% of the finance costs are an allowable deduction from property income. e.g. mortgage. 75% of finance costs: Basic rate tax relief deduction from income tax liability

✓ Pre letting expenditure (7 years)

✓ The cost of replacing furniture and furnishings (Only like for like costs and NO improvements)
(Replacement cost- Proceeds from the disposal of original item)

No distinction between capital & revenue expenditure for things like Plant & Machinery (tools, maintenance)

Question 2

List of costs that are not allowable in the property income?

Answer 2

✓ Cars
✓ Assets provided for use in a residential property. (Not previously there, used to attract new people or increase value e.g. fridge so it is a capital

✓ Capital expenditure on land and buildings (new / improved)- this is included in CGT so don’t want to be taxed on it twice. E.g. that roof repair that increased the value of the place. That is not allowable
✓ Depreciation

Question 3

Is property income calculated via cash or accrual basis?

at what limit must accrual basis be using?

Answer 3

Can be both but cash basis is the DEFAULT

+ Individuals can opt to use whichever but it must be used if property income receipt exceeds £150k

Question 4

Difference between cash and accrual basis in Property income

Answer 4

• Income and expenditure is calculated on the accruals basis (accrual, Prepayment, Depreciation)
• Irrecoverable debts are allowable. You would include rent in the income & take it back out as an allowable expense as bad debt
• Plant and machinery is not an allowable deduction (Because it is CAPITAL) however capital allowances are given instead

Question 5

What is property business losses and how are they dealt with

Answer 5

This is when the rental income for a particular year is less than the allowable expenditure

• Current year relief against other property business profits
• Overall loss on all properties = £Nil
• Unrelieved loss is carried forward and offset against future property business profits. CAN ONLY BE CARRIED FORWARD

Question 6

What is the definition of a premium?

Answer 6

A premium is a lump sum payment made by the tenant to the landlord in consideration for the granting of a short lease. More common in commercial business rather than personal residential businesses

Question 7

What is the definition of a grant?

Answer 7

The grant of a lease is where the owner of a property gives the tenant the exclusive right to use the property for a fixed period of time

Question 8

What is the definition of a short lease?

Answer 8

A period of less than or equal to 50 years

Question 9

What is the formula for property business income?

Answer 9

Premium received x (51-n)/50

Question 10

What is the rent a room relief?

Answer 10

£7,500

Question 11

What is rent a room relief?

Answer 11

This is where an individual lets a furnished accommodation in their main residence.

▪ If rental income is £7,500 or below – exempt from tax.
▪ An individual may elect to ignore the exemption for a particular year, for example, if a loss is incurred when taking account of expenses.

Question 12

How is rent a relief loss calculated? And what is the government’s motivation for us individual regarding which amount should be chosen?\

Answer 12

Do 2 calculations and assess(tax) the lower of;

▪ Normal assessment (Rental income- Expenses=Profit)
▪Rent a room relief (Rental income- £7.5k= Profit)

If the normal assessment gives you a lower amount (e.g. 9k-3k) then ofc you would prefer to use the relief so that you claim more deduction to lower the tax you pay. In this case then, you cancel the normal assessment and you calculate using Profit 9k- 7.5k to work out the assessable/taxable amount which you add back into property income

*Housing crises!! They want you to keep renting out so would prefer you to choose the lower profit so you pay less tax

Question 13

What are the conditions for a furnished holiday letting accommodation?

Answer 13

✓ In UK or EEA (European Economic Area)
✓ Let on a commercial basis- Not just mates, air bnb
✓ Let furnished- kitchen, sofa
✓ Available to let for ≥210 days in the year
✓ Actual let ≥105 days in the year
✓ Not normally let for long-term occupation (i.e. 31 days to same person) in excess of 155 days in a year.
✓ Total of long-term occupation ≤155 days in 12 months e.g. same person booking the place 7 times * 30 days a year is not allowed

Question 14

What are the advantages of a furnished holiday letting accommodation

Answer 14

✓ Relevant earnings for pension relief
✓ Capital allowance available including Annual Investment Allowance on all P&M including furniture when using accrual basis
✓ 100% of finance costs deductible from FHL income
✓ Business asset Entrepreneurs’ Relief for CGT
✓ Rollover Relief
✓ Gift relief

Tax relief each year FOR PENSION
= lower of:
✓ Gross contributions paid
✓ Maximum annual amount
= higher of:
✓ £3,600
✓ 100% of the individual’s relevant earnings, e.g. employment income, trading income

Question 15

What are the losses for a furnished holiday letting accommodation

Answer 15

Any losses are relieves against profits from other qualifying FHL propertifies

▪ Firsly in the same tax year
▪ Then CARRIED FORWARD ONLY against furutre profits from FHL properties only

Question 16

What is the 75% relief and what can it be used for in order for it to be deducted?

Answer 16

✓ For tax year 19/20 tax relief is given on the remaining 75% of costs at the basic rate (20%) by deduction from the taxpayer’s final income tax liability.
✓ It makes no difference whether the finance is used to purchase the property or repair it.
✓ Restriction does not apply where it relates to FHLA or to non-residential property such as offices or warehouses.
✓ The restriction has no impact on basic rate tax payers.
✓ The finance cost restriction of 75% is given in the rates table.

Question 17

Is advertising a deductible cost?

Answer 17

yES

Question 18

Lease premium given as the amount assessed on Landlord, what is your amount

Answer 18

For lease premium if you are given the amount that that was assessed on the landlord as income then the calculation has already been done. You simply need to divide the amount by the number of years.

Question 19

What is the furnished room income/renting room income

Rent received from renting room 8.9k
Cost 2,890

Answer 19

▪ Normal assessment (Rental income- Expenses=Profit)

• £6,010 (8.9-2890)

▪Rent a room relief (Rental income- £7.5k= Profit)

Claiming relief is more beneficial so the income is (8.9-7.5)=1,400 to add onto your property income

Question 20

A roof repair expense that increased the value of the property, is this deductable?

Answer 20

✓ Capital expenditure on land and buildings (new / improved)- this is included in CGT so don’t want to be taxed on it twice. E.g. that roof repair that increased the value of the place.

Question 21

The old shed was destroyed in a storm and was replaced with the modern equivalent of the old shed.

is this deductable?

Answer 21

A shed is not an item acquired for domestic use e.g. furniture, furnishings, household appliances and kitchenware so replacement furniture relief is not available. The shed is a capital asset for which, being a building, there is no tax relief. The expenditure does not qualify as a repair as the whole asset has been replaced.