Property income and investments

1 Property receipts and basis

In this TX lecture: Residential property finance-cost restrictions and the related tax reducer, and detailed ISA investment limits, are not examined in FTX.

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Joint rental property: spouses or civil partners living together who jointly own a let property (not through a partnership) are normally taxed on equal shares of its net rental income. Where their beneficial ownership and income interests are unequal and correspond, both can submit a valid Form 17 declaration to HMRC to use those actual shares instead. They cannot simply choose an arbitrary income split.

2 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

2.1 Basis of assessment

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

Under the cash basis use rents received less allowable expenses paid. A property business normally uses the cash basis if annual receipts do not exceed £150,000, unless it elects for accruals. Above £150,000 use accruals. Under accruals use rent earned and expenses incurred for the tax year.

For a lease premium on a short lease use: taxable property receipt=premium×(51−number of complete lease years)/50. The remainder is capital. The grant of a sublease premium is outside FTX.

3 Allowable expenses and replacement items

3.1 Allowable deductions

Allowable property revenue expenditure must relate wholly and exclusively to the rental business.

Land, buildings and improvements are capital expenditure. Apply the specific cash-basis and replacement-item rules below rather than treating every capital payment alike.

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 @ 45 p

• Over 10,000 miles @ 25 p

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.

• Insurance, letting-agent fees, cleaning, gardening, repairs and other wholly business revenue expenses can be deductible. Improvements are capital. Restrict expenses for private use.

• Under the cash basis qualifying plant/equipment costs other than cars may be deductible directly. Cars use capital allowances or the permitted business mileage method. Residential-property finance-cost restrictions are outside FTX.

4 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.

5 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.

6 Tax-free investments and return pages

• Interest/dividends within an ISA, National Savings Certificates interest and Premium Bond prizes are exempt. Detailed ISA rules/limits are outside FTX. Other ordinary bank/NS&I interest may be taxable.

• Use tenancy agreements, rent records, invoices and replacement-item receipts to complete property supplementary pages. Reconcile rents and expenses to the records; keep cash/accruals dates consistent.

• Use interest statements and dividend vouchers for the main return’s investment sections. Show taxable amounts gross; keep exempt ISA receipts out of taxable totals.