How do you tax property income? How to tax rents? What deductions can you claim for a property business? How do you claim tax relief for losses on property business?

An 'At a glance' freeview guide to property profits and losses.

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At a glance

Property income

Property income describes income that arises from exploiting an interest in a property. Typically property income will be rental income.

A property business is not treated in the same way as trading activity for Income Tax purposes. 

• The cash basis is the default method for unincorporated property businesses with receipts under £150,000.  
• A property business is a business but is treated as an investment activity for Capital Gains Tax (CGT) and Inheritance Tax (IHT) purposes.
• Property income is not normally earnings for National Insurance Contributions (NICs) purposes.
• Property income is subject to special reliefs: see Rent-a-room relief and Replacement of Domestic Items Relief
• From individuals may consider new annual tax allowances; see the Trading and Property Allowance.
• Income from Furnished Holiday Lets is taxed differently to property income. See Furnished Holiday Letting
• Profits and losses made in developing or dealing in land are also treated differently; see Profits from dealing in or developing UK land and Gardens: selling or developing. 
• Higher rate relief on mortgage interest is now restricted for buy-to-let landlords, see Restricting Mortgage Interest Relief.

Property income: what is the basis of assessment?

The profits and losses from a property business are calculated on the same basis as those from a trade or profession.

• The Cash basis is now the default method for unincorporated property businesses with receipts under £150,000.  Taxpayers can elect to apply the accruals basis instead.
• Profits and losses are calculated on a tax year basis for individuals, but by accounting period for companies.
• Partnerships have special rules. 

Property losses

• Property losses may be offset against any other property profits of the same rental business in the year and then carried forward against the future profits of that same business.
• There are special rules where a loss is created by capital allowances or the business is in agriculture. See Adviser guide: Property profits and losses

 Loss claims: Income Tax

• Losses incurred in a year of assessment are either offset against property profits of the year, or carried forward and set against any profits of the property business for future years.
• There may be restrictions to loss relief if the property is not let on a commercial basis. 
  • See Adviser guide: Property profits and losses for more details.

Loss claims: Corporation Tax

• A property loss must first be set against the company's total profits for that accounting period.
• An unrelieved loss may then be used various different ways.
  • See Losses: trading and other losses  for the rules on utilising corporate property losses.

Capital allowances

A property business is a "Qualifying activity" for the purposes of plant and machinery capital allowances, but capital allowances cannot be claimed for the letting of a dwelling house except in certain circumstances:

• Furnished holiday letting.
• A dwelling house used as part of a qualifying trade
  • See Adviser guide: Property profits and losses for other cases where capital allowances can be claimed on residential property.
  • See also Can I back-claim capital allowances on residential property?

Capital allowances are not generally available under the cash basis, but some assets may qualify. See Adviser guide: Property profits and losses. 

Wear and Tear Allowance or repairs and renewals to furniture?

The ‘Wear and Tear Allowance’ has been replaced by the Replacement of Domestic Items Relief.

Up to April 2016 taxpayers could claim either:

• A 10% wear and tear allowance or
• The cost of providing furniture, or replacing or renewing tools as an expense.

Lease premiums

• A premium charged on a lease that does not exceed 50 years is subject to special treatment.
  • See Adviser guide: Property profits and losses for an explanation of the rules and calculations required.

Joint Property

• Joint property is not treated as a partnership for tax unless there the owners have decided to run it as a commercial partnership.
• See Joint Property for more details 

Deductible expenses

Property businesses may deduct expenses as long as they are:

1. Incurred wholly and exclusively for business purposes and
2. Not of a capital nature.

It follows that many of the allowable deductions will be on the same principles as for trading business. See What expenses can I claim?.

Motor expenses

Finance Act 2018 added the use of authorised mileage rates for landlords but with certain restrictions.

• See Adviser guide: Property profits and losses for details of what these restrictions are and when they apply.

Rent A Room relief

• An individual may rent a room in their own residence, and provided the rental income does not exceed the statutory threshold (currently £7,500) the relief completely exempts the rental income.
• See Rent A Room relief.

VAT

Rental income is generally exempt from VAT. The owner of a commercial building may elect to tax a building (this is under Option to Tax arrangements).

• Rental income where a building is being used for storage is standard rated from 1 October 2012.
• Rental income is included in turnover for calculating VAT in applying the relevant percentage under the VAT flat rate scheme.
• VAT will need to be charged when services are included in a rental agreement or licence, see VAT Land & Property: at a glance.
• Furnished Holiday Lettings are subject to VAT, if the landlord is VAT registered.

Construction Industry Scheme (CIS)

Property investors are not required to register for the CIS unless their activities turn them into property developers.

Capital gains

An individual making a profit or gain on the disposal of the freehold or a leasehold interest in property is subject to Capital Gains Tax.

• See How to calculate a capital gain
• See CGT rates and allowances

A company making a profit or gain on the disposal of an interest in property is subject to Corporation Tax.

Capital gains tax reliefs

Disposal of you home or second home

• Private residence relief (PRR) gives you relief from capital gains tax on the disposal of your home. This relief is automatic providing you meet all the qualifying conditions. 
• Lettings relief is a further relief from capital gains tax if you have let out your home.
• If you are letting a property, privately or via airbnb you may cease to qualify for PPR from April 2020.
• See Private Residence Relief: At a glance

Disposal of a property 

• Capital gains tax: disposal of business assets

Links:

This guide should be read with our Property profit & losses tax toolkits:

• Property profits & losses: Toolkit (2020-21)
• Property profits & losses: toolkit (up to April 2016)
• Adviser guide: Property profits and losses