BASIS OF TAXATION OF PROPERTY INCOME
- Like any other business
- Single business for all properties
- Tips – often forgotten expenses to claim
The profit made on property income is taxable. Until 5th April 2017 the profit is calculated as rents less allowable expenses. The rent and allowable expenses are calculated on an “arising” or “accruals” basis and not on a received and paid basis. The exception to this rent where this is less than £15,000 in the tax year, when the amount received may be used.
After April 2017 the default basis for calculating rental income is the cash basis where the income taxable is cash received less cash paid. The Earnings or accruals basis remains an available option.
All property income is treated as arising from a single “property business”. With the exception of furnished holiday lettings, the income is treated as unearned income-i.e. it does not count as income for the purposes of calculating pension contributions, and no National Insurance falls to be paid on it.
The taxation treatment of income from property is governed largely by ITTOIA 2005 s272. The main rule regarding allowable expenses is that they must be wholly and exclusively for the purposes of the business. Any element of private use will disqualify a claim for the expense. However the HMRC Manual at BIM 37600 instructs inspectors to adopt a realistic interpretation that is generally helpful.
Accounts are therefore prepared on the normal basis for businesses excluding any items of expenditure where there is a duality of purpose. From 6th April 2016 the Wear and Tear Allowance is abolished and all replacements of furniture and equipment on a like for like basis is an allowable expense though there remains no relief for the initial expenditure.
Repairs done before a letting commences but done in anticipation of letting the property may be claimed as if the expenditure had occurred on the first day of the letting. However where the building was in such a poor condition that a discount was given on purchase the work done may qualify as a capital expense and not one that could be set against rents.
Commonly overlooked items for which tax relief is available are the cost of travel, and the cost of telephone calls. If the letting business is substantial there may be some justification in making a claim for the additional cost of working from home in maintaining records etc. If the lettings business is substantial and a vehicle is used a lot in connection with the business it may be possible to claim Capital Allowances on it (restricted to the business proportion of its use). If the property is jointly owned and one party has income taxable at the basic rate and the other is taxable at the higher rate then you should ask the basic rate tax payer to undertake the management of the property and pay him/her accordingly. That income is taxable at the basic rate and reduces the higher rate taxpayers liability.
Losses may not be offset against other income but may be carried forward to be set against future profits.
SPLIT OF PROFIT
The profit is normally divided equally among the owners of the property and each pays tax on their own share of the profit. You may elect for the profit to be split on a different basis but your election will only be accepted if you can demonstrate that the new basis generally reflects the way in which the purchase price was provided and the ownership is not husband and wife with joint ownership.