Over the next few weeks/months, I am going to be exploring property income and answering questions like.
What is property income?
A property business is largely treated in the same way as any other trading activity for accounting purposes. So the simple answer here is yes, property income is taxed. However there are some significant differences in tax treatment.
From an accounting basis:
- From 6 April 2017, the cash basis has been the default method for unincorporated property businesses with receipts under £150,000.
- Taxpayers can elect to apply the accruals basis instead.
- Trading or investment business?
- A property business is a business but it is treated as an investment activity for Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT) purposes, this limits the availability of some CGT reliefs or IHT business asset reliefs.
- In the hands of an individual, property income is not earnings for National Insurance Contributions (NICs) purposes unless the activities are such that HMRC regards them as a business for NICs purposes
- HMRC's NIC manual considers that "a person who is liable to Income Tax on the profits arising from the receipt of property rental income will only be a self-employed earner for NICs purposes if the level of activities carried out amounts to running a business".
- HMRC's definition of 'business' in this instance means that property management activities must extend beyond those generally associated with being a landlord. HMRC's examples show that someone who is actively buying, building up and managing a buy-to-let portfolio on a full-time basis is in business for NICs.
- As this is a bit of a grey area, think of it like this: as a rule of thumb if a property business is capable of being described as either a trade, profession or vocation NIC will apply.
What about property partnerships and National Insurance?
In terms of property partnerships, HMRC's view of NICs appears to tie into the definition of business in a conventional partnership.
The 1890 Partnership Act defines a conventional partnership as "the relation which subsists between persons carrying on a business in common with a view of profit".
- Business here includes every trade, occupation, or profession.
- Conversely, a joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership whether the tenants or owners do or do not share any profits.
- Joining up the requirements for a valid partnership with HMRC's NICs manual suggests that if a valid partnership exists, the activity is surely either a trade, profession or vocation and therefore NICs must apply to profits. Property partnerships beware.
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.
- It is not included in turnover calculations for joining the flat rate scheme, it is included for calculating turnover to leave the flat rate scheme.
- Furnished Holiday Lettings are subject to VAT if the landlord is VAT registered.
What about Income Tax on property income?
- Income Tax is charged on property income arising in a tax year so accounts should be drawn up to 5 April each year.
If I have property income, do I pay Corporation Tax?
Some key rules for companies:
- When a company is in receipt of property income it will draw its accounts up on the normal annual basis depending on its own choice of accounting year-end.
- Non-Resident Landlord companies moved from income tax self-assessment to Corporation Tax from 1 April 2020.
- From April 2023 the main rate of Corporation tax increases to 25% for companies with profits over £250,000. Companies with chargeable profits of £50,000 or less will still be liable to tax at the current rate of 19%.
For individuals, property losses may be offset against any other profits of the same rental business in the year and then carried forward against the future profits of that same business.
- Since 2010/11 a loss created by the Annual Investment Allowance cannot be offset against general income if this is part of a tax avoidance arrangement.
Where a loss is created by capital allowances or the business is in agriculture it may be offset against the taxpayer's general income for the year, or the following year.
- Since 2012/13 a property loss created by a business with a relevant agricultural connection cannot be offset against general income if the deduction for agricultural expenses was made in connection with tax avoidance arrangements.
Can Capital allowances be claimed on property income?
Capital allowances cannot be claimed in relation to an ordinary property letting business consisting of the letting of a dwelling house, except for:
- Furnished Holiday Letting which is taxed as a trade.
- A dwelling house used as part of a qualifying trade e.g. for staff accommodation or extended accommodation for a hotel.
- Expenditure relating to shared areas of buildings that consist of multiple self-contained dwellings e.g. a student hall of residence.
- Property income is subject to Rent-a-Room Relief and Replacement of Domestic Items Relief.
- Furnished Holiday Letting is treated differently to property income. It is a trading activity and is subject to different rules.
- Profits and losses made in developing or dealing in land are not taxed as property income, they are generally treated as trading activities.
- Up to 5 April 2015, the Landlord Energy-Savings scheme allowed a deduction to be claimed for the costs of new insulation materials for lofts and cavity walls.
- Up to 5 April 2016, the Wear and Tear Allowance allowed tax relief on the provision of furniture, replacement of tools and articles (including furniture) for furnished or partly furnished property.
- These rules on wear and tear allowance do not prevent claims for repairs and renewals to other assets which are not furniture or tools, such as fixed fixtures and the property. Claims for repairs and renewals are subject to normal rules; relief may be restricted when it is capital
What is Rent-a-Room Relief?
- An individual may rent-a-room in their own residence, and provided that rental income does not exceed the statutory threshold the relief completely exempts the rental income.
- Up to April 2016, the threshold was £4,250 per household. From April 2016, this increased to £7,500 per household.
- Rent-A-Room relief does not apply if a room is rented by a business.
Keep your eyes peeled for my next instalment of information in regards to property income, and follow me, Sonya Jolly Accountancy, on Facebook and Twitter for regular tips, advice and guidance in this area and many others too.