Property income for individuals in a nutshell
UK individuals are taxable on rental profits from property wherever in the world the property is situated. Non-residents are taxable on UK property only. The property may be unfurnished or furnished, commercial or residential, and profits and losses from all UK properties owned by the individual other than as a member of a partnership are pooled together in one UK property business. Likewise profits and losses from all overseas properties are pooled together in one overseas property business. In addition to rental income an amount of income from lease premiums with a duration of 50 years or less must be included in profits. There are special rules for furnished holiday lettings, and there is a rent-a-room relief for furnished rooms let in an individual’s main residence.
How are the rental profits and losses calculated?
Unincorporated property businesses must calculate their profits and losses on a simplified cash basis unless certain conditions are met, the key one for individuals being if gross income exceeds £150,000 in a tax year. An election can, however, be made for the accruals basis to apply. To be allowable, expenses must be incurred ‘wholly and exclusively’ for the purpose of the property business, though HMRC may permit a deduction for the business element of an expense that also has a private element. Tax relief for finance costs on loans for dwellings is restricted to the basic rate. Under the cash basis certain capital expenditure is allowable as a deduction, though some specific restrictions apply. Under the accruals basis capital allowances apply.
What happens if a loss is incurred?
If a property business makes a loss in a tax year it is carried forward against the first-available profits from the same property business.
What are furnished holiday lettings and how are they taxed?
Property which qualifies as a furnished holiday letting (FHL) can benefit from more favourable tax treatment because the income is treated as trading income, so the FHL may benefit from reliefs such as business assets disposal relief, though trade loss relief is not available. Profits and losses from all UK FHLs are pooled together in one UK FHL business. The special treatment of UK FHLs is extended to FHLs in the rest of the EEA, and profits and losses from all EEA FHLs are similarly pooled together in one EEA FHL business.
To qualify as an FHL the property must be let on a commercial basis and be available to the public as holiday accommodation for at least 210 days in the tax year, and actually be let as such for at least 105 of those days. The 105-day test may be met by averaging across FHLs let by the same person. A period of grace may also apply if the 105-day test is not met for one or two consecutive tax years. The FHL cannot be let to the same person for a continuous period exceeding 31 days and periods of longer term occupation must not exceed 155 days per tax year.
Losses from an FHL business can only be carried forward and set against income from the same UK or EEA FHL business and cannot be set against any other property business profits. However, losses from a UK property business can be set against a UK FHL business, and losses from an overseas property business can be set an EEA FHL business.
What happens if an individual lets furnished rooms in their own home while in occupation?
A 'rent-a-room' relief is available for owner-occupiers and tenants who let furnished rooms in their main residence. No part of the property must have been let unfurnished in the same tax year. The relief results in no tax being payable if gross rents before expenses do not exceed £7,500 in the tax year. If more than one person is entitled to rent in the same period, the limit for each individual is £3,750 and this applies even if there are, say, three people entitled to the rent, so that total relief on the property would be £11,250 and not £7,500. Rent for these purposes is payment for accommodation plus related goods and services. The relief can be disapplied, for example if expenses exceed rent so that a loss occurs. If gross rent exceeds the limit available, the options are either to pay tax on the excess rent, or to calculate profits under the normal rules outlined above.