There are two legislation that mentions trading allowance and property income allowance. These legislation are the Finance Act 2017 and Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). 2017/2018 was the first official tax period for property owners to make a claim. It appears to be more surprising in today's expanding property investment market that despite the Act in place, property owners did not have knowledge and understanding of this benefit. It makes submission ratio very low. Useful guidance, information and advice can help the property owners to make a claim and benefit from the tax relief.
The property owners can get £1000.00 deduction in their yearly rental revenue. It includes international property investments. It is essential to mention that despite an international division, claiming allowance is unique to one joint claim submission. It covers circumstances, where the owners have properties located in domestic and foreign places. Property income allowance is also claimable for commercial rental businesses. These businesses include shops, offices, pubs or hotels. The owners can also include residential rental investments including house, flat or maisonette when submitting a claim.
The claim is also replaceable for rental expenses. These rental expenses should be less than £1000.00 in a tax-free annum. For self-assessment completion, the property owners only require to submit to HMRC if the rental revenue is less than £1000.00. It is slightly different where the rental income is between £1000.00 to £2500.00, then reporting to HMRC becomes essential. Property owners may have different circumstances every year. They can decide every year whether reporting to HMRC is relevant to them based on the rental figure they achieve. Completing self-assessment return is must where rental income is above £2500.00. Failure to do so may lead to severe sanctions. So the owners must not miss the deadline for the self-assessment completion.
In a practical context, it is not easy to understand the exact process and the best method to go about it. Our advisory team can help to understand the procedure and assist the property owners step-by-step to implement the best way forward.
Joint property owners benefit more than the sole owners when making a claim. As joint owners, they can apply to £1000.00 individually every year. It is applicable in the circumstance, where they have joint ownership with their spouse or civil partner. In other words, as joint owners, they have a benefit of £2000.00 relief. Contrary to this, rent a room scheme doesn’t offer this flexibility. When claiming rent a room, the joint owners have to share their allowance with their spouse or civil partner. For more details on rent a room scheme, please refer to the section called articles on this website.
The allowance provides enormous benefits to a lower rate taxpayer. It offers savings to £200.00 each year. There are also advantages to the higher rate of taxpayers who can save up to £400.00. Where profit from income exceeds £1000.00, the legislation permits to enjoy partial relief. The owners have the flexibility to choose from one of the following aspects, and both of them are a bit difficult to apply in a practical setting and would require expert advice: Deduct the property income overhead from the revenue using the deduction expenses method;
Or make use of £1.000.00 deduction from the rental income.
The property owners can only claim one relief at a time. One relief means partial relief or go down the route by taking a deduction from the costs in a usual manner. The approach may vary every year. Their circumstances and what they earned during the year may change. When going ahead with the claim, there is a limit to the number of expenses they can claim, such as using partial relief, there is also a limit to claim £1000.00. It is; therefore, you need to decide by weighting the process and cones before taking this approach by reviewing the entire expenses of a specific year. For properties with not so high costs and loans to the bank can be within this category. They may decide to go for partial relief. For huge expenses on damages and repairs, they may find it more beneficial to go for the expenses deduction route. Worth noting, they can also make use of the allowance where their entire costs are within £1000.00 or below it - very beneficial if they cannot find the receipts.
Trading and the property income allowance:
There is a difference between trading allowance and property income allowance. You use trading allowance for self-employment activities but not on the profit that comes from the property business. It is therefore advantageous that for two different types of incomes, the owners qualify for £1000.00 allowance separate to both of them. Such as they have the flexibility to benefit from £1000.00 reduction on rental income and it still gives them entitlement to make a use pf £1000.00 for other self-employment activity.
The property income allowance comes with a few exceptions. They are as follows:
Partnership, a company and the property income allowance:
Another exclusion applies to company, corporate setting and partnerships. So where property owners have a partnership with any other property owners, both of them cannot use the scheme. In this context, a partnership agreement or partnership accounts make a difference. In the event of not having any of the above, they possibly have an ownership right to the property as joint owners. It is the same with a company and where the owners or anyone related to them has a company; they do not have an entitlement to make a claim.
Other exceptions include:
Property owners cannot claim relief on rental income from an employer or anyone related to their employer. It includes spouses' or civil partners' employers;
Where the property owners or anyone related to them take part in nearby work activities, they cannot ask for compensation if an administrator charges their company's rent. It can occur when they choose their home as a work venue;
Some of the latest mortgage interest rules are out of it. So if the mortgage covers these rules, mortgagees have no entitlement to tax reduction. Here the reference is for homeowners when calculating their income tax;
The property owners can not apply for relief for distributable investment funds; Furthermore, real estate investment trusts (REITs) also can not be useable for tax-free allowance.
The above-highlighted elements are subject to further advice and guidance. We strongly recommend the property owners to consult with the legal team before embarking on an application for tax relief. Individual circumstances are always different, and therefore the requirement to take relevant actions may vary. It is still important to seek clarification from an expert before deciding on the right way forward. Our advisers have decades of experience in providing right advice and guidance to the property owners on all sorts of property-related matters. For more information, a quote or for an informal conversation with one of our legal advisers, please use the contact us form at the bottom of this website.