TCTM04006 - Income: Property Income
The Tax Credits (Definition and Calculation of Income) Regulations 2002,Reg. 11
Property income is any income chargeable to income tax as a property business as defined in Part 3 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
Property Income is defined in the income tax legislation as income from rent or other receipts, from estates and any interest or rights in or over land in the United Kingdom, taxable by virtue of Part 3 of ITTOIA.
Normally income from property is not trading income even if a person works full-time running the rental business.
Exceptionally, the provision of services by a landlord can amount to a trade distinct from the rental business. Here, neither the income nor the expenditure relating to these services will be included in the property income figure but should be assessed as trading income (see TCTM04004)
Prior to April 2011 there were special tax rules concerning the commercial letting of furnished holiday accommodation, as although chargeable to income tax as property income, some of the tax treatments available to traders were available to qualifying landlords. From April 2011 any income from this source should be treated as property income.
Property income does not include any profits or gains:
- treated as nil by section 791 to 794 of ITTOIA; or
- excluded from profit or gains by section 795 to 798 of ITTOIA.
This means that income which is exempt from tax by virtue of the “rent-a-room” scheme should be disregarded.
Losses
Where a person’s property business makes a loss and tax relief is given under section 118 (carry forward against subsequent property business profits) and in accordance with section 119 (how relief works) of the Income Tax Act, the amount of that loss is carried forward and deducted from future profits of the property business for the following tax year.
If part of the loss arises from capital allowances or has an agricultural connection and qualifies for tax relief under section 120 (Deduction of property losses from general income) of the Income Tax Act, that part of the loss is set against that claimant’s total income. Any loss that is left unrelieved is set against that claimant’s total income in the following years.
If an overseas property business makes a loss and tax relief is given under sections 118 and 119 of the Income Tax Act, then that loss is deducted from the claimant’s total foreign income (TCTM04007). As with UK property, the loss is carried forward and set against profits from the same source of the following tax year (see also TCTM04003).
Note: In a joint claim, no amount may be set against any income of the claimant’s partner.
Details of how property income is taxed can be found in the Property Income Manual. However, see the Business Income Manual (BIM41015) for the circumstances in which rents received in respect of sub-let business premises may be included in trading income in Part 2 of ITTOIA.
Calculating property income
Prior to 6 April 2017
The figure used for tax credit purposes should be the same as that agreed for income tax purposes.
Post 6 April 2017
Following changes to tax legislation, the way a person’s income tax liability is calculated in respect of their rental income no longer reflects that used for the purposes of tax credits.
When calculating their income tax liability a person will only be able to include a percentage of their finance costs (e.g. mortgage interest) as an allowable expense. The percentage rate will decrease over a period of four years until no relief will be available from 2020/21. These rates will be applied as follows:
2017/18 75%
2018/19 50%
2019/20 25%
2020/21 Nil
For the purposes of tax credits, a person will still be able to deduct 100% of their finance costs when calculating their allowable expenses for property income.
Deductions in computing profits from property income
Generally, expenses can be deducted as long as they are allowable expenses for income tax.