Income from Property

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Income from Property
Theory and practice of taxation AModule code
C33TA1 Lecture 15

• Assessment is on income from UK land and
  property.
• (Schedule A for companies)
• Includes fixed caravans and permanently moored
  houseboats
• Income includes rents, ground rents, lease
  premiums and amounts receivable in respect of
  rights of way
• Classified for income tax purposes as profits of
  a property business. So the income assessable is
  determined in accordance with the principles of
  business income tax

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Property Income- structure of computation

• Property IncomeRents receivable (incl. rent of
  furniture) XLease premiums receivable
  (taxable portion)
  XRights of way income etc.
  X
  
  XLess allowable expenses (X)Income
  assessable X

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Property Income - structure of computation 2

• All rents and expenses are pooled to produce one
  computation
• Expenses may include
• Rent on land sub-let to others
• Interest payable on loans to buy/improve property
  Capital Allowances are given on plant and
  machinery and industrial buildings instead of
  depreciation
• Principles of business tax apply. eg income
  assessable calculated on an accruals basis

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Property Income -Accruals basis

• Example
• Rocky lets a flat for 6,000 p.a. payable half
  yearly in advance on 1 March and 1 September. The
  instalment payable on 1 March 2007 is not paid
  until 10 April 2007
• Allowable expenses amount to 1,000
• Compute Rockys Property Income assessment for
  2006-07

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Property Income

• Basis of assessmentThe basis of assessment of
  Property Income is the annual profits or gains
  arising in the income tax year a current year
  basis of assessment

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Property Income Short Lease Premiums

• Premiums may be payable in addition to the rent
  as a means of obtaining the lease
• Short lease 50 years or less
• Premiums granted on leases of 50 years or less
  are taxable thus
• Assessable amount Premium less 2 for each
  complete year of the lease EXCEPT the first year
• This rule does not apply on the assignment of a
  lease i.e. where a tenant sells their interest in
  an existing lease. It applies on the grant of a
  lease i.e. an new lease comes into existence

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Property Income Short Lease Premiums example

• Al grants Bee a 10 year lease on 1 July 2006 at a
  premium of 30,000 and an annual rent of 5,000
  payable yearly in advance
• What is Als Property Income assessment for
  2006-07?

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Property Income Short Lease Premiums

• Position of tenant
• If tenant is a trader (taxable as Trading Income)
  and pays a premium on a lease he may deduct an
  amount from his taxable profits in each year of
  the lease
• The amount deducted is the amount of the premium
  treated as rent in the landlords computation
  divided by the number of years in the lease.

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Property Income Short Lease Premiums example

• Al grants Bee a 10 year lease on 1 July 2006 at a
  premium of 30,000 and an annual rent of 5,000
  payable yearly in advance
• What is Bees expense that can be deducted from
  her trading income? Her financial year end is 31
  December

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Property Income Source of rents

• Rents from commercial property
• Rents from furnished accommodation. Note rent a
  room relief
• Rents from unfurnished accommodation
• Furnished holiday lettings
• Treatment of all of the above is identical except
  rent a room relief and furnished holiday
  lettings

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Property Income Rent a room relief

• Householders can let rooms in their own house for
  4,250 per annum tax free, providing it is
  furnished accommodation. This is an option and
  taxpayer can be assessed in the normal way (rent
  less expenses)
• Gross rents greater than 4,250 are taxable as
  follows
• 1) Tax payable on the excess rent
• i.e. actual rent received less 4,250 with
  no deduction for expenses or
• 2) Assessment in the normal way

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Rent a room relief- example

• In 2006-07 Joe rents out rooms in his house and
  receives rents totalling 5,000. He incurs
  allowable expenses of 830. What are his options?

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Rent a room relief- example

• Solution he may either
• 1. Do nothing and be assessed on
• Rents 5,000
• Less expenses 830
• Taxable 4,170
• 2. Elect to be assessed on excess rents
• 5,000 - 4,250 750

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Property Income Furnished Holiday Lettings

• Income from the commercial letting of
  qualifying furnished holiday accommodation is
  assessable as property income
• The calculation of the income is the same as for
  other property
• BUT the classification of the income is different
• It is classified as TRADING income which is
  regarded as earned income
• Other property income is classified as
  investment income
• This requires an exception to the pooling of
  income and expenses

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Property Income Furnished Holiday Lettings

• Beneficial effects
• The income as earned income qualifies as Net
  Relevant Earnings for Personal Pension purposes
• As Trading Income
• Losses are treated as Trading losses
• Capital allowances are available in respect of
  furniture (see later)
• Capital Gains Tax business reliefs also apply

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Property Income Furnished Holiday Lettings

• Requirements for qualification
• Let furnished with a view to profit and
• available for letting as holiday accommodation
  for at least 140 days in a tax year
• actually let for at least 70 days
• not normally in same occupation for more than 31
  consecutive days in a 7 month period

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Property Income Furnished Holiday Lettings

• 70 day rule
• Averaging is available if properties do not
  satisfy the 70 day rule
• Days available
  Days letFlat A
  150 65Flat B
  160 85Flat C
  130
  120Flat D 140
  50

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Property Income Computation of taxable profits i

• Overriding principle
• Property Income assessable (specifically the
  taxable profit) is computed in accordance with
  the
• principles of business income tax

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Property Income Computation of taxable profits ii

• Expenses
• Any legitimate business expenditure incurred in
  earning the profits is allowable as a deduction.
  The rules for allowable deductions are based on
  the principles of business income tax
• Expenses which are incurred wholly and
  exclusively for the purposes of the trade,
  profession or vocation

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Property Income Computation of taxable profits
iii

• Example of expenses
• All expense related to running a property
  business
• maintenance, repairs, insurance, management,
  services the landlord is obliged to provide
• expenses which are the occupiers responsibility
  to pay, if paid by the landlord
• Interest payable in respect of property income is
  allowable as a deduction
• But NOT capital expenditure
• Extensionssignificant improvements plant and
  machinery, etc,
• Depreciation is not an allowable expense but
  certain capital allowances may be claimed

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Property Income Capital allowances

• Available on capital expenditure on
• Plant and machinery used for property business
• qualifying industrial buildings
• not on furniture used in a dwelling house
  (Except Furnished Holiday Lettings)

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Property Income Allowance on furnishings

• Where Capital Allowances on furnishings are not
  available (where it is not a holiday letting)
  the owner may choose between
• Renewals basis
• the cost of initial furniture is ignored but the
  costs of subsequent replacements are charged in
  full against rental income
• and
• Wear and tear allowance
  
• 10 of rents less tenants burdens (water
  rates, council tax) paid by landlord

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Property Income Allowance on furnishings
example

• Archie lets a house for 6,000 p.a.
• Expenses
• Council tax 700
• Repairs 200
• Furniture 300
• Compute Archies Property Income assuming the
  wear and tear allowance is claimed

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Property Income Allowance on furnishings example

• Archie Property Income
• Rental income 6,000
• Less Council tax 700
• Repairs 200
• Wear and tear 10 (6,000-700) 530
  1,430
• Property Income 4,570

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Property Income Example - Mr Angus

• Mr Angus rents two factories (classified as
  commercial property). In respect of 2006-07
• The rent is 10,000 and 15,000 respectively.
• Property expenses incurred in amounted to 3,500
  and 4,500 (respectively) with capital allowances
  agreed at 1,250 and 1,750 (respectively). The
  purchase of one of the properties was financed by
  a fixed term loan. Interest amounted to 3,500.
  In addition, Mr Angus received net rental income
  of 2,600 from furnished holiday lettings which
  he owns. He rents a room in his house for an
  annual rent of 4,500 per annum.
• Compute his Property Income

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Example - Mr Angus

• Mr Angus Property Income 2006-07
• 
  Rental income
  
  25,000Less property expenses
  8,000 loan interest
  3,500 capital allowances
  3,000 14,500Net rental income
  
  10,500Furnished holiday lettings
  2,600Room in private residence
  4,500Less rent a room relief
  4,250 250 Property Income
  
  13,350

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Property Income Losses

• Loss Relief
• Property Losses are normally carried forward to
  set against future Property Income
• Exceptions
• Losses on furnished holiday lettings
• Losses due to capital allowances
• Losses due to agricultural expenses
• These may be set against the taxpayers Total
  income of current or following year
• NB these losses must be claimed in full - even if
  this means lost personal allowances

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Property Income Losses -Example

• Lord Tweedy has the following results from
  letting property
  2005-06 2006-07 Profits (losses)
  (2,500) 1,000
• Other income 6,000
  6,000

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Property Income Losses Example

• 2005-06
  2006-07Profit
  - 1,000
• Less Losses b/fwd -
  (1,000) Property Income nil
  nil
• Other income 6,000
  6,000
• Property Losses c/fwd (2,500)
  (1,500)
• Loss used against first year available. Cant
  preserve in order to make use of PA

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Property Income Classification of Income

• In the Personal Income Tax Computation
• Property income is included with Trading Income
  and Employment Income as non savings income
  (see example in lecture 3)
• The classification Earned income Unearned
  (or investment) income may be required. eg to
  calculate net relevant earnings for pension
  contributions

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Property Income Classification of Income

• Earned income
• Trading Income
• Employment Income
• Property Income - Furnished holiday lettings
• Unearned income
• Property Income- except furnished holiday
  lettings
• Other savings income (bank interest etc)

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Property Income Comprehensive Example

• Mr Angus revisited
• Data as before add In addition to his property
  income in 2006-07 Mr Angus received a salary from
  non pensionable employment of 25,000 with
  benefits in kind amounting to 3,000. He also
  received National Savings Bank - ordinary account
  interest of 200. He is unmarried and registered
  blind.
• Compute his Taxable income for 2006-07 classified
  into non-savings and savings and indicate the
  earned income