Introduction to Property Income
Premiums on leases are taxed as property income. Lease is right to occupy land for specified period
of time. If a taxpayer owns a property and they grant a lease to another taxpayer in return for a
payment called a premium, some of that premium can be chargeable to tax as property income.
Calculation of Profits
Property income profit for property businesses operated by individual is, by default calculated using
the cash basis where gross property income does not exceed £150,000 for the tax year. Where the
£150,000 limit is exceeded, the property income profit must be calculated using the accruals basis.
o The election for accruals basis must be made by the first anniversary of 31st January
following the end of the tax year for which the election is made. The election only applies
for the tax year for which it is made, so if a taxpayer wants to continue to be assessed using
the accruals basis, a new lection must be made each year.
Gross property income is property income received in the tax year, on a cash basis. If the property
business is carried on for part of the tax year, the £150,00 limit is reduced proportionately.
The Cash Basis
Formula for cash basis is Rent Received – Expenses Paid = Property Income/Loss.
Sone landlords may use a rental agent to manage the property rental and collect the rents. Under
the cash basis, income is recognised based on the date that it is paid to the agent, not the date that
the agent passes it to the landlord.
A tenant may be required to pay a security deposit to a landlord, which may be returned in full or in
part oat the end of the tenancy. As the deposit is still legally owned by the tenant, it will only be
recognised as a receipt under the cash basis when the landlord becomes legally entitles to retain all
or part of it at the end of a tenancy.
The Accruals Basis
Formula for accruals basis is Rent Receivable – Expenses Payable = Property Income/Loss.
o Receivable means rents that relate to the tax year, which is not necessarily the same as the
cash physically received.
o Payable means expenses that relates to the tax year, which is not necessarily the same as
the cash physically paid.
Allowable Expenses
Expenses are deductible if those expenses are incurred ‘wholly and exclusively’ for the business of
the letting.
,Insurance premiums paid by the landlord are also deductible. In practice, the landlord will be
responsible for paying the buildings insurance, but any contents insurance would be the tenants
responsibility.
Where property is calculated under the cash basis, we simply deduct the amount of the allowable
expenses actually paid in the tax year.
Where property income is calculated under the accruals basis, we deduct the expenses that are
payable for that year, regardless of when they are paid.
An expenses is not deductible unless it is wholly and exclusively for the purpose of the rental
business. However, where an expenses has both business and private purpose, HMRC will allow a
deduction for a proportion of the expenses where a define part of it is wholly and exclusively for the
rental business.
Motor Expenses
When landlord acquires a vehicle that will be used for property business purposes, they can choose
to deduct:
o Proportion of actual motor expenses that relate to the business use, or,
o Flat rate expenses of business miles travelled.
o This choice is available for motor expenses under both the cash basis and the
accruals basis. The flat rates are follows:
▪ 45p per business mile for the 10,000 business miles.
▪ 25p thereafter.
• The flat rate expense covers the costs of buying, running and
maintaining the vehicle, such as fuel, serving, repairs and insurance.
o Once the landlord claimed to use the flat rate expense in
respect of a vehicle, this method of relief must be claimed
consistently year after year for as long that vehicle remains
in the business.
Capital Expenditure v Revenue Expenditure
Capital expenditure results in an asset and is therefore generally not deductible in calculating
property income, although a deduction is available for capital expenditure on certain plant and
machinery under the cash basis.
Revenue expenditure is an expenses, and if it allowable is deductible when calculating property
income. This applies under both cash basis and the accruals basis.
Expenditure on certain items is clearly capital. Expenditure which enhances or improves the
property is also capital expenditure.
The costs of the provision of furnishing and other items in property is capital expenditure. HMRC
have stated that replacement of free standing white goods is not repair as the item has not become
part of the property, and therefore the expenditure is capital expenditure.
, o Where an item is attached to the building it become part of the building. This is known as a
fixture. When the item is repairs or replaced, the expenditure is treated as a repair to the
building. Even if the repairs are substantial that does not make them capital provided that
the character of the asset remains unchanged.
Capital Expenditure – Plant and Machinery
Under accruals basis, capital allowance may be claimed in respect of capital expenditure on plant
and machinery used in the property business.
Under cash basis, relief for capital expenditure on plant and machinery is given by deducting the
cost of the asset when it is acquired, therefore, capital allowances cannot be claimed.
o Exception is cars used in the business. Capital allowance cannot be claimed on vehicles if
the landlord has opted to deduct flat rate expenses for that vehicle.
o There is no relief for the initial costs of furniture and household equipment (domestic
items) provided for use in a residential property under the cash basis or the accruals basis.
The exception to this is if the property is a furnished holiday letting.
Replacement Domestic Items Relief
Where residential property is let out, relief can be claimed for the costs of replacing domestic items
used in the property, under both the cash and accruals basis. The amount of allowable deduction is
reduced by any amounts received on the disposal of the old item. However, relief is available for
incidental expenditure incurred on disposing of the old item or purchasing the new item.
This relief is not available where the property is furnished holiday letting or where rent-a-room
relief is claimed. No relief is available where there is an element of private use.
Relief for Interest
Property let out is commercial property or a furnished holiday letting, the interest will be
deductible in full in arriving at the property income. Therefore, relief will be available at the
taxpayer’s marginal rate of tax and interest paid can create or increase a loss. Relief is available as
for another allowable expenses.
However, different rule for obtaining relief where interest is paid by an individual in respect of a
loan to purchase a residential property:
o Interest in respect of a residential property:
o Loan interest is not allowable as a deduction when calculating property income in
respect of residential properties. Interest is only eligible for basic rate tax relief
which is given as a reduction in arriving at the individual’s income tax liability.
o In a tax year, relief at basic rate is available on the lowest of:
▪ Eligible Interest,
▪ Property income for the year less property losses brought forward,
▪ Adjusted total income, which is net income less savings and dividend income
less the personal allowance.
