New property allowance: Useful but not that simple?

New property allowance: Useful but not that simple?

The property allowance aims to provide simplicity and certainty regarding income tax obligations on small amounts of income from renting out property. Here's a guide to its application

Read the latest article on changes to non-resident property taxation here.

Two new £1,000 tax-free allowances are available from 6 April 2017 – the property allowance and the trading allowance.[1]  This article looks at the property allowance only, the trading allowance being the subject of a previous article in October.

The aim of the property allowance is to provide simplicity and certainty regarding income tax obligations on small amounts of income from renting out property.

Although the concept of a £1,000 tax free allowance sounds attractive, there are a number of exclusions which are likely to limit its application in practice.

What income does the property allowance apply to?

The property allowance applies to relevant property income which includes:

  • Both UK and overseas property businesses;
  • Both commercial and residential letting (but not rent-a-room businesses – see below).

If an individual has more than one property business, for example a UK and an overseas business, then the receipts of both trades are combined with only a single £1,000 allowance available.

Full relief or partial relief?

At its simplest form, the property allowance provides for full relief from income tax if an individual’s relevant property income (turnover, not profit) in the year is less than £1,000.

Not only is there no income tax to pay, but also no need to register with HMRC or file tax returns provided property income is below this level. Individuals who qualify for full relief will, however, need to monitor their property income year on year: if it goes above £1,000 they will be subject to self-assessment. The ATT has asked HMRC for clarification on the relevant record-keeping obligations.

Where property income exceeds £1,000, the legislation allows for so called partial relief. Effectively, individuals can choose either to:

  • Deduct their actual property business expenses from their income in the usual way; or
  • Elect instead for the £1,000 property allowance as a deduction from income.

It should be noted that if you claim partial relief you cannot deduct any other expenses, just the £1,000 allowance.

Individuals can decide on a year-by-year basis which approach to take. The best option will depend upon the level of expenses in the property business. Businesses with low outgoings (e.g. a single property with no mortgage and few, if any, repairs) may be better off with partial relief. However, if there is a large revenue expense in the year, for example a one-off repair bill, it may be better to claim actual expenses.

Interaction with rent-a-room relief

A rent-a-room property business does not qualify for either partial relief or full relief under the property allowance. As the rent-a-room relief limit (currently £7,500) is more generous than the property allowance this is unlikely to be a concern.

In addition, the property allowance is not available at all to an individual if they have a business which qualifies for rent-a-room relief, but they choose to disapply it. The intention is to prevent individuals from using the property allowance if they choose to deduct actual expenses in calculating the profits of another property business.

As a result, the property allowance is most likely to be of benefit for non-rent-a-room property businesses such as the letting of:

  • Commercial property (e.g. an office or garage); or
  • Second or holiday homes where there are minimal expenses.

On 1 December, the government launched a call for evidence on rent-a-room relief with a view to its reform. Any changes arising from this, such as a redesign to better support long term lettings, could increase the popularity of the property allowance.

Partnership or joint property?

A key exclusion in the property allowance rules is that it cannot be claimed in respect of partnership property income. This therefore raises the question of whether a property business is conducted by a partnership (which would not qualify for relief) or merely arises from jointly held property (which would). For example, the co-ownership of a rental property by a husband and wife, should qualify.

If there is no partnership agreement or accounts, and no partnership return has ever been filed, it is likely that the property is jointly owned, and therefore qualifies for relief.[2]

It should be noted that, unlike rent-a-room relief, if property is jointly held then each person is entitled to the full £1,000 property allowance.

Other exclusions

In addition to the exclusions for partnerships and rent-a-room income, the property allowance rules include some other exclusions to be aware of, in particular:

  • No relief is available if an individual’s property income includes any amounts received from:
    • An employer, or a spouse/civil partner’s employer,
    • A partnership in which they (or a connected party) are a partner, or
    • A close company in which they (or an associate) are a participator (i.e. relief can’t be claimed where a director charges their company rent for use of their home);
  • The property allowance is not available to an individual if they claim a tax reduction under the new mortgage interest rules for landlords in computing their income tax;
  • Relief cannot be claimed for distributions from an Authorised Investment Fund (AIF) or Real Estate Investment Trust (REIT).

[1] More information on the income tax treatment of jointly owned property can be found in HMRC’s Property Income Manual at PIM1030.  This states that, usually, there won’t be a partnership and the taxpayer’s share from the jointly owned property will be included as part of their personal rental business profits.

[2] The legislation for the property allowance is introduced by s17 and Schedule 3 of Finance (No. 2) Act 2017 which insert new Part 6A into ITTOIA 2005

 

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