Trading and Property Allowances (TAPAs) - Part 2

This blog talks about the Property Income Allowance, with the Trading Income Allowance being discussed last week.

These exemptions seem to have slipped under the radar slightly, with a lot of people I talk to not really knowing much about them. This might have something to do with them being introduced in the Budget 2016 and then being excluded from the original Finance Act 2017 as they didn’t have enough time to debate them!

What is the Property Income allowance?

The aim of the property allowance is to provide simplicity and certainty regarding income tax obligations on small amounts of income from renting out property.

The concept of a £1,000 tax free allowance sounds attractive, but there are a number of exclusions which are likely to limit its application in practice.

The property allowance applies to relevant property income which includes:

• Both UK and overseas property businesses;
• Both commercial and residential letting (but not rent-a-room businesses – see below).

If an individual has more than one property business, for example a UK and an overseas business, then the receipts of both trades are combined with only a single £1,000 allowance available.

At its simplest form, the property allowance provides for full relief from income tax if an individual’s relevant property income (turnover, not profit) in the year is less than £1,000.

There is no need to register with HMRC or file tax returns provided property income is below this level. (Unless you need to register for another reason)

Individuals who qualify for full relief will need to monitor their property income year on year: if it goes above £1,000 they will be subject to self-assessment.

Where property income exceeds £1,000, the legislation allows for so called partial relief. Effectively, individuals can choose either to:

• Deduct their actual property business expenses from their income in the usual way; or
• Elect instead for the £1,000 property allowance as a deduction from income, without any relief for other expenses

The good thing is that Individuals can decide on a year-by-year basis which approach to take. This will depend upon the level of expenses in the property business. As a guide:

• If you have low outgoings (e.g. a single property with no mortgage and few, if any, repairs) may be better off with partial relief.
• If there is a large revenue expense in the year, for example a one-off repair bill, it may be better to claim actual expenses.

A rent-a-room property business does not qualify for either partial relief or full relief under the property allowance. As the rent-a-room relief limit (currently £7,500) is more generous than the property allowance this is unlikely to be a concern.

Partnership or joint property?

A key exclusion in the property allowance rules is that it cannot be claimed in respect of partnership property income. This therefore raises the question of whether a property business is conducted by a partnership (which would not qualify for relief) or merely arises from jointly held property (which would).

If there is no partnership agreement or accounts, and no partnership return has ever been filed, it is likely that the property is jointly owned, and therefore qualifies for relief. Co-ownership of a rental property by a husband and wife, should therefore qualify

Unlike rent-a-room relief, if property is jointly held then each person is entitled to the full £1,000 property allowance.