Property income

Question 1

What is the cash basis for property income?

Answer 1

• is the basis default for individuals and partnerships to calculate assessable income from land and buildings each tax year
• rental income received less related expenses paid

Question 2

The main rules for property income, cash basis allowable deductions

Answer 2

• the expenses must have been incurred wholly and exclusively for the purposes of the property business
• relief is available for any expenditure incurred before letting commenced, under the normal pre-trading expenditure rules
• if the property is occupied for part of the year by the owner, any expenses relating to the private use are not allowable expenses
• there are special rules which apply to capital expenditure incurred by an individual in a property business

Question 3

What expenses could be deducted from property income?

Answer 3

• insurance
• agents’ fees and other management expenses
• repairs
• interest on a loan to acquire or improve a let non-residential property

Question 4

What is the tax relief on property income?

Answer 4

• is given on let residential property finance costs at the basic rate (20%) by detection from the taxpayer’s final income tax liability. No part of loan finance costs is allowed as an expense of the property business

Question 5

What rules are applying to property income?

Answer 5

• to loans to acquire, improve or repair a residential let property and also loans to acquire equipment or assets used for the residential letting business
• the finance costs restricted include interest payable, as well as the incidental costs of obtaining the finance, e.g. bank fees
  -rules do not apply to companies or qualifying furnished holiday accommodation and that interest related to a non-residential property, such as a leased office or warehouse, is still fully deductible from rental income as an expense o the letting business

Question 6

Capital expenditure

Answer 6

• no distinction between capital and revenue expenditure in respect of plant and machinery and equipment for tax purposes
• expenditure on plant and machinery (except cars) used in a property business, such as tools used for maintenance of the property or office equipment used for running the business is an allowable deduction from income when paid
• general rule does not apply to: - cars, assets provided for use in a residential property e.g. furniture, TV
• on land and buildings is not allowable deduction, with the exception of some non-residential properties

Question 7

What means repair?

Answer 7

• the restoration of an asset by replacing subsidiary parts of the whole asset, for example replacing roof tiles blown off in a storm

Question 8

What means capital expenditure?

Answer 8

• significant improvements are made to the asset beyond its original condition
• example: taking off the roof and building another storey

Question 9

What is car allowance regarding property income?

Answer 9

• are available on the capital cost of the cars
• motoring costs: e.g. petrol, insurance
• approved mileage allowance :
  first 10,000 miles p.a. 45p
  over 10,000 miles p.a. 25p

Question 10

Replacement domestic items relief

Answer 10

• furnished residential lettings a special relief, replacement domestic items relief
• allows a deduction for the replacement of domestic items provided by the landlord
• replacement costs less any proceeds form the disposal of the original item
• allowed is limited to the cost of a similar item, excluding any improvement, but allowing for the modern equivalent
• domestic items are those acquired for domestic use for example, furniture, furnishing, carpets, kitchenware
• this relief is not available to furnished holiday lettings

Question 11

Accrual basis?

Answer 11

• an individual or partnership may opt to use the accruals basis and it must be used if property income receipts exceed £150,000
• rent receivable, expenses payable
• under cash basis outstanding rent is not taxed but when accrual basis then taxed, irrecoverable debt is referred to as an impairment loss

Question 12

Property business losses

Answer 12

• profits and losses on all the properties are aggregated to calculate the assessable income for the tax year
• overall loss on all properties, the property income assessment for the tax year is £Nil.
• any unrelieved loss is carried forward indefinitely and is offset against the first available future property business profits

Question 13

What is the premium?

Answer 13

• is a lump sum payment made by the tenant to the landlord in consideration for the granting of a lease

Question 14

What is the grant of lease?0

Answer 14

• is where the owner of a property gives the tenant the exclusive right to use the property for a fixed period of time.

Question 15

What is the short lease?

Answer 15

• is a lease for a period of less than or equal to 50 years

Question 16

When is the part of premium received assessed on landlord as property income?

Answer 16

• in the tax year the lease is granted

Question 17

What is the calculation of property income?

Answer 17

Premium less: Premium x 2% x (n-1)
- where n = lenght of lease = number of complete years (ignore part of a year)
ALTERNATIVE
- premium x (51 - n )/50

Question 18

Furnished holiday lettings

Answer 18

• are still assessable as property income but are treated as though the profits arose from a single and separate trade

Question 19

Qualifying conditions the letting be treated as FHA

Answer 19

• property is let furnished
• the letting is on commercial basis with a view to the realisation of profits
• it is available for commercial letting, to the public generally as holiday accommodation for not less than 210 days a year
• the accommodation is actually let for at least 105 days a year

Question 20

What is the long-term occupation?

Answer 20

• is defined as a period of more than 31 consecutive days when the property is let to the same person

Question 21

What are the advantages and reliefs for tax treatment of furnished holiday lettings?

Answer 21

• the profits are treated as relevant earnings for the purposes of tax relief for pension scheme contributions
• finance costs are fully deductible as a business expense i.e. there is no basic rate tax relief restriction
• plant & machinery
  cash basis - deduction is available on a paid basis for plant and machinery acquired including future and furnishings
  accruals basis - capital allowances are available in respect of plant and machinery including furniture and furnishings
• capital gains tax rollover relief, gift holdover relief and business asset disposal relief are available

Question 22

Rent-a-room relief

Answer 22

• gross annual rental receipts are £7,500 or less
• the income is exempt from tax
• the individual’s limit of £7,500 is reduced by half to £3,750 if, during a particular tax year, any other person also received income from letting accommodation in the property while the property was the first person’s main residence

Question 23

What are the method for rental income ? assess lower of:

Answer 23

1. Rental income received ( or receivable) Less: expenses paid (or payable) = profit
2. Rental income received ( or receivable) Less: Rent-a-room relief (£7,500) = Profit