Meg Saksida outlines the property allowance and points out when it is a good idea.
The property allowance was announced in the Autumn statement 2016 with the policy objective to reduce tax complexity for small landlords and the simplification of the taxation of small property receipts.
At £1,000 a year, the property allowance is a standard amount, which can be offset against property income received, instead of the exact precise costs and expenses that a taxpayer has actually incurred. A choice can be made for every tax year as to whether it is in the interests of the landlord to use the property allowance for that tax year; and a different option can be chosen every year.
Get your own!
If a property is held jointly, each taxpayer owner has their own property allowance and the election to use it or not can be chosen by one of them irrespective of how the other joint owner has chosen to tax their share.
For example, if a couple own a small flat, yielding £12,000 income a year with £500 total costs, one of the couple could elect to show £6,000 of income with £1,000 property allowance against the income, and one £6,000 with £250, their actual share of costs against the income.
Relevant property income below £1,000
If the taxpayer’s relevant property income does not exceed £1,000, and as such, they could have opted for the property allowance (and therefore not had any tax to pay), HMRC does not require a return at all.
It is assumed that all taxpayers with income up to £1,000 would opt for the property allowance and it is automatic. This is extremely useful for individuals with a small property business such as letting out say a ‘lock up’ or a garage only. Not only will they have no tax to pay on the property income, but the income will not need to be notified to HMRC.
The figure that the £1,000 is compared to is the taxpayers ‘relevant property income’, which is the gross property income before any deductions or expenses; so will usually equate to the rental income on the rental contract.
The property allowance cannot be used in conjunction with the rent-a-room allowance, so the taxpayer will need to choose whether to take the benefit of the property allowance or the rent-a-room scheme. As such, the relevant property income will not include any rent-a-room income. Sometimes a landlord will have adjusted income if they have changed from using the cash and accruals bases. This income will also not count as relevant property income for the property allowance.
Because the property allowance applies automatically for income under £1,000, if the individual has incurred costs over £1,000 and made a loss, they will probably prefer to declare the actual costs of the letting and not use the property allowance. In these cases, an election can be made to disapply the property allowance and to deduct the actual expenses incurred instead.
Relevant property income above £1,000
The property allowance is also very useful if the actual costs of the property are under £1,000, and the income is over £1,000.
In this case, although the landlord will need to notify HMRC of the income and declare the tax due, rather than deducting the actual (smaller) expenses incurred, the property allowance of £1,000 can be used. This time the property allowance will not be automatic and usually a landlord will input all his or her actual expenses. If the actual expenses are lower than £1,000, an election will need to be made to use the (higher) property allowance.
Both the election not to use and the election to use the property allowance needs to be made by a year after 31 January following the tax year. This gives the landlord plenty of time to decide whether the election is worthwhile for that year or not.
When the property allowance is not available
There are some sources of property income that are unable to use the property allowance.
As already mentioned, the rent-a-room relief scheme is an example of this. If the income qualifies for the conditions of the rent-a-room scheme, the taxpayer will not be able to use the property allowance even if they decide to treat the rent-a-room income as normal property income and do not use the rent-a-room tax benefits.
If the relevant property income is from a close company (one where there are no more than five participators or any number of directors that control the company) which the individual taxpayer is either a participator themselves or an associate of a participator, that income will be ineligible for the property allowance; likewise if the relevant property income is being received by the individual’s employer or their spouse or civil partner’s employer.
Finally, any relevant property income from a firm where the taxpayer is either a partner or connected to a partner in that firm. For example, if some office space is let from an employee to their employer, they must offset all the exact costs and expenses. The blanket £1,000 property allowance is not available, and this is the same not just for that income, but for all property income the taxpayer has. If he or she had another office let to a third party for example, the individual could not use the property allowance for that income either.
Case study: Background
Bob, Billy and Brian are triplets. They had the following property income in 2020/21.
- Bob let out a small retail unit to Yip Ltd, a trading company in which he has a 40% holding and the other 60% is held by his two school friends. He earned £13,000 and had costs of £700. He also let a small house for £15,000 with costs of £300.
- Billy let out a garage in Bath and earned £900. There were no repairs to make in the year, but Billy painted the garage door at a cost of £100.
- Brian let out a small apartment in Wales. He generated £6,000 income during the year and had to replace both the dishwasher and the oven at a cost of £1,100.
Can and should the triplets use the property allowance?
Case study: Solution
- Bob cannot use the property allowance as the income is from a close company and he is a participator. He cannot use it on the house either. He will declare income of £28,000 and costs of £1,000.
- Billy has relevant property income of under £1,000 so the property allowance is automatic. There is no reason why he should not elect for it. He will not need to notify HMRC or have any tax to pay on the rental of the garage.
- Brian can elect to use the property allowance if he wishes, but as his costs and relevant property income are more than £1,000, he must declare his income anyway and there is no advantage to offsetting £1,000 property income rather than £1,100 of costs. Brian will therefore declare income of £6,000 and costs of £1,100.
The property allowance is particularly helpful in situations where relevant property income has been received under £1,000 and no or very low costs have been incurred. In these situations, not only is there no tax to pay, but there are no reporting requirements either.