Property Income and Investments – Individuals

YouTube videoLoad YouTube video

1 Property Income

The following income is liable to assessment as property income:

1. rents received/receivable under any lease or tenancy agreement

2. premium received on the grant of a short lease

1.1 Basis of assessment

Income from land and buildings prior to 2021/22 was computed for individuals as if the letting of property was a business, and the amount assessable in the tax year was computed on the accruals basis:

Less: expenses payable (x)

From 2021/22 the 'cash basis' is the default method where receipts are no more than £150,000 pa and in an exam question should be assumed to apply unless specifically stated to the contrary. Where receipts are no more than £150,000, a taxpayer may elect to use the accruals basis, but where property income receipts exceed £150,000 a taxpayer must use the accruals basis.

Income from different properties are pooled together in a single computation:

1.2 Allowable deductions

1. To be allowable an expense must have been paid by the taxpayer and incurred wholly and exclusively in connection with the rental business for example:

• insurance

• agents’ fees and other management expenses

• cleaning and gardening

• repairs and maintenance, painting and decorating

• for motor car expenses incurred the taxpayer may use the HMRC approved mileage allowances instead of actual motor expenses incurred

• Finance expenses in relation to a residential property are NOT allowable expenses but see section 3 below - Finance expenses on residential property - to see how tax relief is given in relation to such expenses.

1. Capital expenditure is not allowable:

• Repairs are allowable revenue expenses.

• Improvements are capital and therefore disallowed

• Expenditure on plant and machinery (not cars) used in the maintenance of the property is an allowable deduction under the cash basis.

1. Capital allowances are available on cars, and actual motor expenses are deductible when paid. Alternatively, use the HMRC approved mileage allowance:

• First 10,000 miles @ 45p

• Over 10,000 miles @ 25p

1. If residential lettings are either partly or fully furnished, tax relief is usually given for the furniture and furnishings by way of Replacement of Domestic Items Relief. There is NO relief for the initial cost of furniture and furnishings. There is ONLY relief when assets are replaced. This will include furnishings such as carpets and curtains, electrical equipment such as TVs, fridges, freezers and washing machines and even cutlery and crockery.

2. The amount of relief is reduced by any proceeds from selling the old asset which has been replaced and relief is not given for any cost which represents an improvement, for example, if a fridge is replaced with a fridge freezer, only the cost of an equivalent fridge qualifies for relief.

3. Relief is available for allowable expenditure incurred before letting commenced, under the pre-trading expenditure rules; ie expenditure incurred up to 7 years prior to renting is treated as being incurred on the first day of the letting business.

2 Property losses

If total expenses exceed total income, the property income assessment is nil and the excess property loss is carried forward and offset against future property income profits only.

3 Finance expenses on residential property

Tax relief for the costs of financing residential rental property is restricted to the basic rate of tax.

Finance costs are not deducted from property income. Instead, relief is given as a 'tax reducer'; i.e. as a deduction from the individual’s income tax liability at the basic rate of tax.

These special rules apply to interest and associated incidental costs (e.g. arrangement fees) on loans to:

• acquire, improve or repair a residential let property, and

• acquire equipment or assets used for the residential letting business.

Note that these rules do not apply to companies or commercial properties.

For example, if a taxpayer incurs mortgage interest expense of £5,000 on a residential property, none of it will be shown as an allowable expense against property income. Instead it will achieve tax relief as a tax reducer at the basic rate of 20%, thus reducing the Income Tax liability by £1,000 (£5,000 x 20%).

4 Rent a room relief

If an individual lets a furnished room or rooms in his or her main residence as living accommodation then rent received up to £7,500 p.a. is exempt.

The exemption may be ignored if the taxpayer wants to generate a loss where expenses exceed income, or where actual expenses exceed £7,500.

If rent received exceeds £7,500 p.a. the tax payer may choose to assess as follows:

1. Ordinary calculation (cash basis)

1. Alternative calculation (election)

The election for 2025/26 must be made by 31 January 2028 and stays in force until it is revoked.

5 Lease premiums on grant of short lease (50 years or less)

5.1 Introduction

1. When a tenant takes on a new lease he may be required to pay a one-off premium in addition to the annual rent. If the lease is for less than 50 years (a short lease), part of the premium is assessed on the landlord as property income and the remainder is treated as a capital receipt.

2. The amount of the premium assessed as property income is:

Where:   P = total premium

n = duration of lease in years

Alternatively the assessable premium may be computed as the full premium received less 2% of the premium for the number of years of the lease less one year:

5.2 Trading Profit deduction for traders

Where a trader has paid a premium for a short lease he may deduct the following annual amount against his trading profit in each of the years of the lease in which the property is used in the trade. This is in addition to any rental cost incurred:

6 Individual Savings Accounts (ISAs)

6.1 Individual Savings Accounts (ISAs) have for many years been the most common form of tax efficient investment.

The main advantages of ISAs are:

1. Income is free of income tax.

2. Disposals of investments within an ISA are free from capital gains tax (CGT).

3. No minimum holding period - withdrawals can be made at any time.

4. The introduction of the savings income and dividend income nil rate bands have removed the main benefits to most taxpayers of investing in an ISA but still give advantage to taxpayers with larger amounts of such income and for taxpayers selling shares where they have already made full use of their annual exempt amount (see later notes on CGT).

6.2 Components of an ISA

1. Cash - for example in a bank account

2. Stocks and shares listed anywhere in the world

6.3 Subscription limits

The annual subscription limit is £20,000 per tax year and ISAs permit the taxpayer complete flexibility over the mix of investments in either cash or stocks and shares.

This limit will be provided in the tax rates and allowances section of the exam paper.

7 National savings

National Savings Certificates - interest on these is exempt from Income Tax.

However, some interest on National Savings & Investments (NS&I) products are taxable, namely:

• NS&I Easy Access account / NS&I Direct Saver Account

• NS&I Investments accounts

To a larger question:

It is unlikely to form a major part of a Section C question but may be a section of such a 10/15 mark question: