Property income for individuals definition

View the related Tax Guidance about Property income for individuals

Taxation of property income for individuals

Taxation of property income for individualsThis guidance note summarises the position where the person has an investment in property as a sole trader or through a partnership and is therefore subject to income tax on property income. For details of the taxation of property income in companies, see the Taxation of property income for companies guidance note and for a comparison of the difference between holding a property as an investment or for trading purposes see the Property investment or trading? guidance note.In terms of whether the property should be held individually, in partnership or in a company, the factors will be very similar to those for choosing a trading vehicle. This is considered in the Choosing the business vehicle guidance note.Also, see Tolley’s Tax Planning 2019/20 Chapter 34.2–34.20.UK property businessFor income tax purposes, rental profits from land and buildings are categorised as either:•a UK property business, or•an overseas property business, see the Overseas property business for individuals guidance noteEngland, Wales, Scotland and Northern Ireland make up the countries of the UK. The Isle of Man and the Channel Islands are treated as overseas for the purposes of the legislation.This means that profits from UK-situs properties are pooled together and reported as one business, and profits from properties sited outside the UK are pooled together and reported as one business.The exceptions to this are:•furnished holiday lettings, which are calculated and reported separately, see the

Foreign land and property income

Foreign land and property incomeThis guidance note covers, in outline, the UK tax consequences of deriving income from land or property overseas.It looks at the interaction with overseas taxes, and considers the UK tax treatment of let property, overseas farms, woodlands, and the use of companies to hold foreign holiday property. Furnished holiday lets situated abroad are covered in the Furnished holiday lets guidance note. This guidance note does not cover capital gains, VAT or inheritance tax, except incidentally.For more on capital gains tax, see the Disposal of land ― individuals and Assignment and grant of leases for capital gains tax guidance notes.Property held in trust is outside the scope of this guidance note. For information on this, see Simon’s Taxes I5.12. This guidance note also does not extend to remittance users, see the Remittance basis ― overview guidance note for more detail.Hotels and guesthouses are treated as foreign businesses, see the Setting up overseas ― sole traders and partners and Introduction to setting up overseas ― companies guidance notes for some of the issues to consider when setting up a foreign business.Interaction with overseas taxesIncome from farms, woodland or let property outside the UK is almost invariably subject to tax in the overseas country. Comprehensive advice on the foreign tax implications is essential, and this is best obtained before the individual begins the overseas venture.In particular, the individual should be aware of the tax residence rules in the foreign country, so they does not accidentally become taxable there

Property allowance

Property allowanceThe £1,000 allowances for property and trading income were introduced from 2017/18 onwards. This guidance note considers the property allowance, although commentary is included in relation to the trading allowance, if relevant. For full details of the trading allowance, see the Trading allowance guidance note.The property allowance works in a similar way to rent-a-room relief, in that the first £1,000 of gross property income is exempt from income tax. If the income exceeds £1,000, the taxpayer has a choice of:•deducting the £1,000 property allowance from their gross income and being taxable on the excess, or•deducting allowable expenses from gross property income in the normal wayThe trading allowance and property allowance are mutually exclusive. Therefore, it is possible for the individual to have £1,000 of gross trading receipts (which must include miscellaneous receipts) and £1,000 of gross property receipts, and the entire £2,000 would be exempt from income tax.The property allowance is of most benefit to micro-entrepreneurs, such as those letting property through sites such as Airbnb, although it is worth considering whether rent-a-room relief applies as the relief is more generous, see the Rent-a-room relief guidance note.The property allowance removes reporting obligations for those with low levels of second income, which is a welcome simplification. It also means that those who are accidentally non-compliant may no longer face penalties.The property allowance is set at £1,000 and can only be amended by secondary legislation, meaning it is unlikely that the level of the

Property income for individuals ― overview

Property income for individuals ― overviewProperty income ― the tax chargeThe charge to UK income tax applies to the profits of both a UK and an overseas property business, and a property business is one that generates income from land such as rents or licences paid to occupy the land. A UK resident person (ie an individual or trustee) is subject to income tax on the profits of both their UK and overseas property businesses. A non-UK resident person (ie an individual, trustee or, prior to 6 April 2020, a non-UK resident company investing in property) is only subject to income tax on the profits of their UK property business and not their overseas property business. Some activities are not treated for tax purposes as a property business, these include:•a trader who lets out an unused part of land or premises, eg

Trade or hobby

Trade or hobbyInteraction of hobby farming rules and commercialityFarming has its own set of ‘hobby farming rules’, which historically have stated that a profit must be made every six years. This is known as ‘the five-year rule’, in that there can be five years of losses but there must be a profit in the sixth year. However, HMRC is currently taking a very close look at all loss claims and the reasons behind them.The hobby farming rules were introduced in the 1960s due to concerns over taxpayers farming for recreational purposes and not for commercial reasons. The original intention was to restrict loss relief in ‘extreme cases’ where the trading activities bore no relationship to the criteria of a commercial trade. The so-called ‘five-year rule’ was introduced as an extension to the original rules. It acted as a further test to show that the business is capable of making a profit. There are provisions to prevent the formation of a company or a change of partnership being falsely used to break the five-year rule. In the latter case, husband and wife are treated as the same person.BIM85620 states the position is as follows with regards to ITA 2007, s 67:‘The five-year rule only applies to trading losses arising from farming or market gardening activities. The rule denies trade loss relief against general income etc (see BIM85605) where a loss computed without regard to capital allowances was incurred in each of the

Deceased’s income tax position

Deceased’s income tax positionTaxable income in year of deathWhen an individual dies, there is a personal income tax liability on the income that arises in the period starting on 6 April before death and ending with the date of death. This note describes how to quantify that income and calculate the tax due.Generally speaking, taxable income in the year of death is calculated in the same way as for any other tax year, except that the end of the period is the date of death. However, there are a number of special rules that have to be considered and these relate mainly to the time at which income and deductions are taken into account. This is important for deciding whether the income arising is that of the deceased or that of the personal representatives.For all sources of income, the usual basis of assessment rules apply, and most questions about calculation and recognition can be resolved by reference to them. A number of sources of income are considered below. These highlight rules that are in point only because the taxpayer has died. Links are provided to the relevant guidance notes in the Personal Tax module which provide further information on the taxation of those types of income.Employment incomeEmployment income is assessed on a receipts basis. So the statutory basis of assessment for earnings that are received (or remitted to the UK) after a person’s death, is that they are assessable on the personal representatives and they are not included in

Property losses for individuals

Property losses for individualsFor income tax purposes, rental profits from land and buildings are categorised as either:•a UK property business, or•an overseas property business, see the Overseas property business for individuals guidance noteEngland, Wales, Scotland and Northern Ireland make up the countries of the UK. The Isle of Man and the Channel Islands are treated as overseas for the purposes of the legislation.This means that UK rental profits are pooled together and reported as one business, and overseas rental profits are pooled together and reported as one business. This guidance note refers to a UK property business, but the rules apply equally to an overseas property business.The exceptions to this are:•furnished holiday lettings which are calculated and reported separately, see the Furnished holiday lets guidance note•properties let at an uncommercial rent, as the expenses are limited to the amount of the rent, see the Allowable expenses for property businesses guidance noteUK property businesses are considered further in the Taxation of property income for individuals guidance note.This guidance notes looks at the income tax rules around property losses. For corporation tax rules on property loss relief, see the Property business losses for companies guidance note.Calculating a lossProperty business losses are calculated in the same way as property business profits. From 2017/18 onwards, there are two possible bases that can be used to calculate property business profits and losses:•the simplified cash basis, which is the default

Simplified cash basis for unincorporated property businesses

Simplified cash basis for unincorporated property businessesThe income tax regime in relation to property businesses changed with effect from 2017/18 onwards with the introduction of the statutory simplified cash basis. This guidance note summarises when the simplified cash basis can be used for property businesses, the treatment of common property income and expenses and the restrictions as to how property losses can be relieved. However, the legislation is complicated and, therefore, before advising clients, it is advisable to consider the statutory provisions carefully in relation to the client’s circumstances. For further reading, see Simon’s Taxes B6.202C–B6.202E.For ease of reference, the alternative to the simplified cash basis is referred to as the ‘accruals basis’ in this guidance note, although of course this means the basis under which both generally accepted accounting practice (GAAP) and standard tax provisions apply. For discussion of these rules, see the Taxation of property income for individuals and Allowable expenses for property businesses guidance notes.When should the simplified cash basis be used for a property business?The simplified cash basis for property businesses is the default method of calculating property income so the simplified cash basis must be used unless any of the following conditions apply:ConditionCommentThe property business is carried on by a company, a limited liability partnership (LLP), a partnership with a corporate partner, or a trustTherefore, the simplified cash basis applies to property businesses run by individuals and those run

Taxation of untaxed income of a partnership

Taxation of untaxed income of a partnershipIntroductionThis note explains how untaxed income received by a partner from his partnership is taxed. The Untaxed income of a partnership guidance note details what income is included as ‘untaxed income’.For the taxation of taxed income, see the Taxation of taxed income of a partnership guidance note. For the taxation of trading profits, see the Taxation of partnership trading profits guidance note. For foreign income, see the Partnership foreign income and tax paid guidance note.How is untaxed partnership income taxed?A partnership’s untaxed income is dealt with as follows:•the income receivable for the partnership period of account is identified and any allowable expenses are deducted (eg repairs will be deductible against rental income)•the net amount is then divided between the partners in the profit-sharing ratio which applies to trading income for that period of account•the amount allocated to each partner is then treated as arising from a second ‘notional trade’ *•this second notional trade or profession is deemed to commence whenever a person joins the partnership, or if later, when the partnership begins to trade•the notional trade is deemed to cease when the individual leaves the partnership, or if earlier, when the partnership ceases to trade **•this treatment also applies if there are losses rather than profitsITTOIA 2005, ss 854–

Life insurance policies ― top slicing relief

Life insurance policies ― top slicing reliefThe profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains) and taxed last after all other income (ie top sliced) in the income tax computation. Usually the gain has a 20% deemed tax credit attached, which means that if the policyholder is a basic rate taxpayer they do not have any further tax to pay. For more on the tax credit and the reporting of life insurance gains, see the Life insurance policies guidance note. You should read that note before continuing as the commentary below assumes familiarity with the terms discussed in that guidance note.Different rules may apply to foreign policies and these are covered in the Offshore bonds and other foreign policies guidance note. That guidance note also explains how to find out if your client has a foreign policy.However, there is an inherent unfairness in treating the life insurance gain as income in one year; the profit has actually accrued over the lifetime of the policy but due to these provisions is subject to tax all in one year. This can be advantageous if the taxpayer is able to ensure their other income is low enough to allow all the life insurance gain to be taxed at the basic rate (see below). It is a disadvantage where the gain means that the taxpayer pays more tax than they would have done had the gain had been taxed a proportionately across the