What is Property Income Allowance?

HMRC expects you to keep proper records of your income and expenses if you want to claim the property and trading allowances. You can claim up to £1K each year in property allowance. If you have both property and trading income, you will qualify for a £1,000 allowance.

You will not have to tell HMRC or declare the income in the tax year if your annual gross property earnings are £1,000 or less from one or more properties. 

If you own a property jointly with someone, a partner, or others, you can apply to get the £1,000 allowance against your share of the gross rental income. Also, you may still be required to fill in a tax return for other income. You must register for Self Assessment and declare your income on a tax return to claim tax exemption.

If you own a property jointly with others (spouses or civil partners), you can claim £1,000, but there are some conditions where you may not apply for it. ( as given below )- 

• Claim the tax reducer for -mortgage interest for a residential property,

• You cannot use it to generate a tax repayment;

• If you are a new landlord who has an ongoing rental income, you may want to choose to claim your basic expenses to generate a tax loss to set off against future business rental profits;

• If your expenses are more than rental earnings, you might want to claim expenses instead of the allowance. For example, you can deduct the expenses from income from letting a room in your own home instead of using the Rent a Room Scheme allowance benefits. 

• You can't use it on income from letting a room or if you own a house jointly with others, where each partner is separately eligible for the property income allowance.

• You cannot use the property compensation for trading losses.

What is Property Income? 

Property income is calculated as any income from land or buildings, which includes rental income from a flat or house or form part of a flat or house, for example - a room or a parking space or even a caravan, a caravan pitch or a houseboat. Income from the rent collected from the tenants and payments are taxable.

Property income does not include income through trade, for example, running a hotel or unrelated business from home. Profits relating to trade are taxable as self-employment income. 

Property income profits are taxable unless it falls within one of the exempt categories. If the reliefs or allowances do not apply to your case, you will need to pay income tax on any profits and less allowable expenses. 

What is the Property Income Allowance for 2021?

The last date for filing the 2020-21 self-assessment was 31 January 2022. You can use the allowance to pay less tax on your rental income. You may not need to fill out the forms if your expenses are less than the £1K allowances.

When was the Property Allowance introduced? 

Two new £1,000 tax-free allowances were made available from 6 April 2017 – the trading and property allowances. The property allowance applies to applicable rental income, including UK and overseas property businesses and commercial and residential lettings (but not rent-a-room).

If an individual has more than one property business, for example, the UK and an overseas business, both receipts are combined with a single allowance.

Full relief or partial relief-

If you wish to opt out of full relief, make an election for it. However, it is not to be given by 31 January, in the second year after the end of the tax year. 

If you wish to use partial relief, you still have to make an election in the same manner. 

What is the income limit for the Personal Allowance? 

UK taxpayers get a UK personal allowance on their taxable income. The standard personal tax allowance is £12,570 for 2022-2023. In income tax assessment, any income you earn more than that will be considered taxable.

The amount of tax you pay after your allowance depends on how much you earn during a tax year. Up to £12,570, the allowance is 0 per cent, and over £12,571 to £50,270; the rate is 20%. Those earnings more than £50,271 to £150,000 need to pay 40%, and over that band, the rate is 45%.

Property Income Allowance Example 

If, during the tax year 2020/2021, you get a rental income of £1,750 from letting a property you own jointly, your share of the income is £875, and you are entitled to use the property allowance of £1K. You don't need to pay property taxes on this income or register as a landlord with HMRC. Also, if you get a rental of £500 and your rental loss was £1,500, you can file to record a tax loss to the register as a landlord.

One cannot claim the property income allowance and expenses; you need to claim the £1K allowance or property expenses. 

While in certain other cases, you can claim both property and trading income allowance, depending on your situation.

HMRC Property Income Allowance 

You need to inform HMRC if you are using the allowances. If you use the allowance, you can subtract up to £1000 from your income, but not more than the amount of your rental income. One can use it if the rental expenses are under £1,000. If your expenses are more than your earnings, you may claim expenses instead of the allowance.

You must declare it to HMRC if you have:

• Gross property income over £1K up to £2.5K

• Property income over £2.5K

You can contact HMRC on the phone to understand more about it or register for a Self-assessment online. You cannot use the benefit if you get income from other types of properties, i.e. – 

• A firm that you own or control 

• You jointly own a company.

• You are in a partnership with your employer. 

You cannot claim the tax reducer for non-deductible costs on loan or deduct expenses from income from letting a room in your home.

If you are filing a claim for property and trading allowances, HMRC expects you to keep proper records of your income and expenditure, i.e. -

• Copies of invoices

• A spreadsheet of the income receipts

• Emails to confirm the receipt. Statements from the firm that paid you showing the amount you received.

• Bank statements / Bank deposits(pay-in records)

• A diary or appointments book showing your income from each customer.

What income does the Property Allowance apply to?

If you rent out a furnished room under the rent-a-room relief scheme, you do not have to tell HMRC about the earnings if the rent is less than £7,500. In the same way, if you share the income with other people and your share is less than £3,750, you do not need to inform, but if your rental income is more than the property allowance, you can deduct the relief rather than the actual expenses.

All kinds of Real Estate Investments - let properties held by a person or group of people, in the UK, except furnished holiday lettings, are categorised into the property income business where the profits and losses can be estimated for all, rather than on property basis. Then you can deduct total expenses from total rental income.

However, you cannot deduct interest and finance costs for the residential let-in property. Relief is given by lowering the tax bill by 20 per cent of your interest and finance costs, where the income and expenses related to furnished holiday lettings are calculated individually.

If property income is more than £1K, one can use the provisions of partial relief. For example, you can cut the actual property business expense from the income in the usual way or elect the £1,000 property allowance as a deduction from income.

How does the Property Allowance work?

If your rental income is over £1,000 but expenses are less, you can claim the allowance or deduct £1,000 when working out your gains rather than deducting your actual expenses. In addition, you can elect partial or full relief or determine whether to use the property allowance for each tax year separately or not.

What is the Trading Income Allowance?

Gross trading income means all your trading, miscellaneous and casual income before taking off any expenses.

The trading allowance is up to £1,000 per financial year. You can use the benefit against any gross income made through self-employment, casual or miscellaneous sources (like babysitting or selling goods online). In such conditions, one can use the trading allowance and the personal allowance to get full relief on taxes if you earn less than £1K through self-employment and other activities.

You do not need to register your self-employment with HMRC to complete a Self Assessment tax return. Even if you have to complete a tax return for another reason, you do not need to include income fully covered by the trading allowance. You can even claim partial relief if you earn more than £1K.

In case you have already completed a tax return for other reasons. For example, you claimed 'full relief' using the trading allowance by mistake; you must modify your tax return to include any new income. You can, nevertheless, then claim 'partial relief' of the trading allowance instead of actual expenses.

£1000 Trading Allowance Scrapped

No, it has not been scrapped, but there may be some occasions when it is advised not to use it as it requires you to report the income covered by the allowance where you will have to provide certain details like the universal credit details.

You will also need to amend your application if you have incorrectly claimed 'partial relief' against income where you already deducted the actual expenses before calculating the tax returns.

Allowable Expenses for Landlords

Allowable expenses for landlords came into effect on 6 April 2017. A landlord is supposed to pay tax on the income earned from the rented property. The profit is calculated after deducting certain allowances from the income that include the following-

· General maintenance and repair costs.

· Legal and insurance fees.

· Wages of people hired to work on maintenance of the property.

· Travelling/administration expenses.

· Insurance

· Gas and electricity bills, water rates and council tax paid by the landlord.

· Agency and property management fees.

· Cost of services, for example, cleaners, gardeners and ground rent.

 If you own more than one rental property in the UK, all your rental income and allowable expenses must be treated as one.

Allowable expenses mean whatever you need to spend on renting your property. In short, it is the expenditure you need to incur for the up-keep of your rental property. The landlord is not required to pay tax on the amount spent on repairs or maintenance of a rental property.

The cost of purchasing or improving a property, like getting an extension, cannot be claimed as expenditure against your rental income. The distinction between capital and revenue expenditure is not clear. Also, there are different rules for vacant properties or those houses where the landlords suffered losses.

Exemptions

You cannot consider the following as allowable expenses:

· Expenses on extravagance /entertainments

· Mortgage repayments 

· Mortgage interest payments 

Tax on Overseas Property Rental Income

 Income from foreign properties is not added together with UK property gains. You have to show them separately when you fill in a complete Self Assessment tax return that mentions all types of foreign earnings. You have to pay for the UK tax liability; you may benefit from some relief against your bill if you have already paid foreign tax on the earnings.

Conclusion:-

A property allowance is £1,000, but you cannot use rent-a-room relief and the property allowance against the same property income. However, you do not have to declare your income to HMRC if the total rental gains (before expenses) in 2022-23 were lower than or equal to £1K as your tax will be calculated automatically, or you can opt to be taxed in the normal way to claim reliefs on expenses on repairs and maintenance.

The best way is to estimate the level of expenses; if there are a few, you can go with partial relief. Otherwise, it may be more reasonable to claim actual expenses.

For example, you can claim actual expenses if you suffer a rental loss or damages. However, if you elect to use the property allowance, you cannot claim such losses or deductions for allowable expenses.