View the related Tax Guidance about Property income for individuals
Allowable expenses for property businesses
Allowable expenses for property businessesThis guidance note applies to companies and individuals with commercial or residential properties and shows the contrasts in treatment between the corporate and individual tax regimes.General itemsMany of the principles applying to allowable expenses for property businesses are similar to those that apply for trading and the rules for individuals in a property business are generally the same as for companies with some exceptions which are highlighted in the detailed sections below. One notable difference in allowable property expenses between individuals and companies is the treatment of interest expenses. Details of the rules for income tax purposes are included in the Deduction of interest against property income ― income tax rules guidance note and the corporation tax rules are set out in the Taxation of loan relationships guidance note.Note that of the fixed rate deductions for expenses available for the self-employed carrying on trades, professions and vocations, only the fixed rate deductions for business mileage applies to those carrying on a property business. See ‘Travelling costs’ below. This is because the rules in ITTOIA 2005, ss 94H, 94I (deductions for the use of home for business purposes and premises used both as a home and business premises) are not included in the list of provisions that apply to profits of a property business by virtue of ITTOIA 2005, ss 272, 272ZA.The rule that expenditure must be ‘wholly and exclusively’ for the business applies. For more information, see the Wholly and exclusively guidance note. This guidance
Rent-a-room relief
Rent-a-room reliefThis guidance note explains the principles of rent-a-room relief and its impact on calculation and reporting of property income for individuals.Rent-a-room relief provides an exemptions and removes the requirement to notify for low levels of rental income from a lodger in an individuals home. It also provides a simplified method of calculating profits where income exceeds a de-minims limit.If the gross rents are less than £7,500 (£4,250 for tax years between 1997/98 and 2015/16), the income is ignored for income tax purposes, although this limit will be halved if another person is also entitled to the income. For example, where a couple own the property jointly, the limit is reduced to £3,750 each, even if the income is not split equally.The rent-a-room scheme is designed to apply where a lodger shares the taxpayer’s own home. It cannot be applied to rooms let as an office or otherwise for business purposes, although this would not prevent the lodger from, say, being a student with an area set aside for study. The scheme may be used for a bed and breakfast or guest house businesses run from the taxpayer’s main residence, provided the other conditions are met.To check whether relief is due, see our interactive flowchart. Alternatively, for a static pdf version, see the Flowchart ― rent-a-room relief.ConditionsIncome must be otherwise taxable as trading income or property incomeTo qualify for rent-a-room relief, the individual must receive rent or associated payment for goods / services (eg meals, cleaning and laundry) in
Foreign land and property income
Foreign land and property incomeThis guidance note covers, in outline, the UK tax consequences of deriving income from land or property overseas.It looks at the interaction with overseas taxes, and considers the UK tax treatment of let property, overseas farms, woodlands, and the use of companies to hold foreign holiday property. Furnished holiday lets situated abroad are covered in the Furnished holiday lets guidance note although it should be noted that the furnished holiday let tax regime will be abolished from April 2025. This guidance note does not cover capital gains, VAT or inheritance tax, except incidentally.For more on capital gains tax, see the Disposal of land ― individuals and Assignment and grant of leases for capital gains tax guidance notes.Property held in trust is outside the scope of this guidance note. For information on this, see Simon’s Taxes I5.12. This guidance note also does not extend to remittance users, see the Remittance basis ― overview guidance note for more detail.Hotels and guesthouses are treated as foreign businesses, see the Setting up overseas ― sole traders and partners and Introduction to setting up overseas ― companies guidance notes for some of the issues to consider when setting up a foreign business.Interaction with overseas taxesIncome from farms, woodland or let property outside the UK is almost invariably subject to tax in the overseas country. Comprehensive advice on the foreign tax implications is essential, and this is best obtained before the individual begins the overseas venture.In particular, the individual should be
Property income for individuals ― overview
Property income for individuals ― overviewProperty income ― the tax chargeThe charge to UK income tax applies to the profits of both a UK and an overseas property business, and a property business is one that generates income from land such as rents or licences paid to occupy the land. A UK resident person (ie an individual or trustee) is subject to income tax on the profits of both their UK and overseas property businesses. A non-UK resident person (ie an individual, trustee or, prior to 6 April 2020, a non-UK resident company investing in property) is only subject to income tax on the profits of their UK property business and not their overseas property business. Some activities are not treated for tax purposes as a property business, these include:•a trader who lets out an unused part of land or premises,
Farming ― restriction of losses for hobby farming
Farming ― restriction of losses for hobby farmingThis guidance note sets out the specific tax rules which determine whether a farm enterprise is treated as a commercial business or a hobby activity. One rule looks at the commercial basis of the farm and the other reviews situations where the farming activity has incurred losses for several successive years. The impact of being treated as a hobby farm is to restrict the use of losses. They prevent farming trade losses from being relieved against other income (or in some cases capital gains) of the same, or previous tax year, commonly referred to as sideways loss relief. The rules apply for both unincorporated businesses and companies. The legislation is set out in ITA 2007, ss 66–70 and CTA 2010, ss 44, 48–49 and HMRC guidance is at BIM85615, CTM04710 and CTM04600.Further details can be found in Simon’s Taxes B5.175 and Stanley: Taxation of Farmers and Landowners, 2.93.General commentary on losses can be found in the following guidance notes:•Sole trader losses ― established trades•Sole trader loss relief ― opening years•Relief for partnership losses•Corporate trading losses ― overviewSummary of loss restrictionsFirstly the farmer has to demonstrate that the farm’s activities are carried out on a commercial basis, and with a view to the realisation of profits. If not, loss relief against general income for individuals or total profits for companies is denied. Next farming has its own set of ‘hobby farming rules’, which state that a profit must be
Deceased’s income tax position
Deceased’s income tax positionTaxable income in year of deathWhen an individual dies, there is a personal income tax liability on the income that arises in the period starting on 6 April before death and ending with the date of death. This note describes how to quantify that income and calculate the tax due.Generally speaking, taxable income in the year of death is calculated in the same way as for any other tax year, except that the end of the period is the date of death. However, there are a number of special rules that have to be considered and these relate mainly to the time at which income and deductions are taken into account. This is important for deciding whether the income arising is that of the deceased or that of the personal representatives.For all sources of income, the usual basis of assessment rules apply, and most questions about calculation and recognition can be resolved by reference to them. A number of sources of income are considered below. These highlight rules that are in point only because the taxpayer has died. Links are provided to the relevant guidance notes in the Personal Tax module which provide further information on the taxation of those types of income.Employment incomeEmployment income is assessed on a receipts basis. So the statutory basis of assessment for earnings that are received (or remitted to the UK) after a person’s death, is that they are assessable on the personal representatives and they are not included in
Is there a partnership?
Is there a partnership?This guidance note looks at whether a partnership exists which is partly determined by legislation found in the Partnership Act 1890 and also the courts have provided a significant volume of case law.Not all business arrangements between individuals or companies are partnerships, some can be joint ventures which quite often just involve cooperation on a specific project. Similarly the letting of jointly held property usually does not have enough business organisation to constitute a partnership, see the Taxation of property income for individuals guidance note.It is also not uncommon to find that people have been trading in partnership without realising it. Care is thus needed, as the special tax rules which apply to partnerships can give unexpected results, particularly where losses are concerned. See the Relief for partnership losses guidance note.The definition of a partnership is ‘the relation which subsists between persons carrying on a business in common with a view of profit’ and indications that this definition is met would include the following:•a relationship between the parties, possibly a evidenced by a partnership deed•the parties carrying on a business together which must be separate and distinct from other businesses
Property losses for individuals
Property losses for individualsThis guidance note sets out how individuals can obtain tax relief for losses incurred in a rental business. For income tax purposes, rental profits from land and buildings are categorised as either:•a UK property business, or•an overseas property business, see the Overseas property business for individuals guidance noteEngland, Wales, Scotland and Northern Ireland make up the countries of the UK. The Isle of Man and the Channel Islands are treated as overseas for the purposes of the legislation.This means that UK rental profits are pooled together and reported as one business, and overseas rental profits are pooled together and reported as one business. This guidance note refers to a UK property business, but the rules apply equally to an overseas property business.The exceptions to this are:•furnished holiday lettings which are calculated and reported separately, see the Furnished holiday lets guidance note but it should be noted that the furnished holiday let tax regime will be abolished from April 2025•properties let at an uncommercial rent, as the expenses are limited to the amount of the rent, see the Allowable expenses for property businesses guidance noteUK property businesses are considered further in the Taxation of property income for individuals guidance note.This guidance notes looks at the income tax rules around property losses. For corporation tax rules on property loss relief, see the Property business losses for companies guidance note.Calculating profit and lossProperty business losses are calculated in the same way as property business profits.
Taxation of other income of a partnership
Taxation of other income of a partnershipThis guidance note explains how other income received by a partner from a partnership is taxed. The Other partnership income guidance note details what income is included as ‘other income’.For the taxation of trading profits, see the Taxation of partnership trading profits guidance note. For foreign income, see the Partnership foreign income and tax paid guidance note.A partnership’s untaxed income is dealt with as follows:•the income receivable for the partnership period of account is identified and any allowable expenses are deducted (eg repairs will be deductible against rental income)•the net amount is then divided between the partners in the profit-sharing ratio which applies to trading income for that period of accountThe allocation to a tax year for individual partners then depends on the relevant tax year as set out below. For corporate partners other income is included in the company’s self assessment return. Where the period for which the partnership makes up accounts does not coincide with the company’s accounting period, the amounts are apportioned to the company’s accounting periods on a time basis.Untaxed partnership income on a tax year basisWhere a partnership carries on a trade but also has untaxed non-trading income from other sources, from tax year 2024/25 the income is taxed on a tax year basis, the same as trading income, see the Tax year basis from 2024/25 onwards guidance note.Transitional basis period for 2023/24Prior to 2024/25 untaxed income is treated as a second notional business (see below)
Life insurance policies ― top slicing relief
Life insurance policies ― top slicing reliefThe profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains) and taxed last after all other income (ie top sliced) in the income tax computation. Usually the gain has a 20% deemed tax credit attached, which means that if the policyholder is a basic rate taxpayer they do not have any further tax to pay. For more on the tax credit and the reporting of life insurance gains, see the Life insurance policies guidance note. You should read that note before continuing as the commentary below assumes familiarity with the terms discussed in that guidance note.Different rules may apply to foreign policies and these are covered in the Offshore bonds and other foreign policies guidance note. That guidance note also explains how to find out if your client has a foreign policy.However, there is an inherent unfairness in treating the life insurance gain as income in one year; the profit has actually accrued over the lifetime of the policy but due to these provisions is subject to tax all in one year. This can be advantageous if the taxpayer is able to ensure their other income is low enough to allow all the life insurance gain to be taxed at the basic rate (see below). It is a disadvantage where the gain means that the taxpayer pays more tax than they would have done had the gain had been taxed a proportionately across the
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