PIM4487 - Property allowance: contents: examples: when it's not beneficial to claim a S274A deduction

Leila has rental receipts in the tax year 2018-19 of £800 from renting out a residential property she owns for part of the year. She has expenses of £300 for repairs and interest expenses of £200 on the mortgage for the property. Leila is also employed and earns £60,000 per year so is a higher rate tax payer. She has no other income and is not eligible to any allowances other than her person allowance of £11,850 per year.

Scenario 1

If a S274A deduction is claimed, Leila would not be able to use the property allowance and her tax liability on her rental income would be calculated as follows:

Rental income: £800

Finance costs (£200): £100 is allowable (50%)

Other expenses: £300

Property business profits: £400

Income from employment: £60,000

Income Tax Position 2018-19 (figures for rates and bands do not apply to Scottish Taxpayers)

Total Income: £60,400

Personal allowance: £11,850

Basic Rate Tax at 20% on £34,500: £6,900

Higher Rate Tax at 40% on £14,050: £5,620

Tax liability (before tax reducers): £12,520

S274A tax reducer claimed: £20 (£100 x basic rate of Income Tax of 20%)

Income tax liability: £12,500 (£6,900+£5,620-£20)

Scenario 2

Alternatively, if Leila chose not to use the S274A reducer, she would be able to use the property allowance such that there would no tax liability on her £800 of property income:

Relevant property income: £800

As this does not exceed the property allowance (£1,000), this amount would not be brought into account when calculating Leila’s liability to Income Tax for tax year 2018-19 and neither would her associated expenses.

Income Tax Position 2018-19 (figures for rates and bands do not apply to Scottish Taxpayers)

Income from employment: £60,000

Total Income: £60,000

Personal allowance: £11,850

Basic Rate Tax at 20% on £34,500: £6,900

Higher Rate Tax at 40% on £13,650: £5,460

Income tax liability of: £12,360 (£6,900+£5,460)

The £100 of finance costs that would have been restricted if Leila had claimed expenses, could not be brought-forward to create or increase her reducer in later tax years.