Property income

… Computation
… rent-a-room relief
… Furnished holiday lettings
(FHL) relief

BRUCE NTEGE www.camstudies.org

 Computation
2

… Property income covers rent from UK property (both

furnished and unfurnished commercial/residential)
… Property business income is calculated on the accruals
basis for the tax year e.g. 6.4.14 – 5.4.15.
… Calculated in much the same way as trading profit i.e
† Property rental income; ADD
† Assessable portion (income element) of a short lease
premium (50 years or less) received calculated as: Premium
– [2% x (n – 1) x premium] where n = length of lease in
years; LESS
† Allowable expenses
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Question 1: Short lease premium
3

… Mr B grants a 20 year lease on a commercial

property to Mr A on 25 March 2015 at a premium
of £10,000.
… Calculate the proportion of the premium assessable
as property business profit on Mr B for 2014/15

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Solution to Question 1: Short term lease
4

£
Gross premium 10,000
Less: Capital element 2% x £10,000 x (20 – 1) (3,800)
Income element 6,200

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Allowable expenses
5
… Rents and expenses of all properties are pooled to
give a single property income figure.
… The allowable expenses must be of a revenue nature
incurred by the landlord wholly & exclusively in
relation to the letting of the property (before, during
and in between leases). These include:
… Property maintenance (e.g. Cleaning)
… Repairs (but not if cause was before the property was
acquired)
… Insurance
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Allowable expenses
6

… Management (e.g. Accountancy and legal fees)

… Rent payable
… Water rates
… Council tax (for residential property only) or business
rates (for commercial property)
… Capital allowances on the cost of plant and
machinery used for property maintenance (e.g.
cleaning equipment)
… Bad debts
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Allowable expenses
7

… Loan interest
… For furnished (residential) properties, a 10%

wear and tear allowance is claimed instead of

capital allowances – i.e. Computed as:
† 10% x [(gross rent less (water rates + council tax)]
… If a property business loss is made, the loss is
carried forward and set against future
property business income

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 2: Property Business profit computation
8

… Miss Davis purchased a house on 06 July 2014. It was let on a

furnished basis from 06 Sept 2014 at an annual rent of
£6,000 payable monthly in advance.
… When the lease was granted for a period of 10 years, a lease
premium of £5,000 was received from the tenant. Expenses in
the accounting period were:
† Repairs of £4,000, incurred in August 2014. £2,200 of
this amount related to the repair of the roof damaged
by a storm in May 2014. The price Miss Davis paid for
the property was discounted to take into account of the
cost she would incur on the repairs. The other £1,800
relates to external & internal painting and decoration.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Question 2: Property Business profit computation
9

† Council tax of £600 and water rates of £360 – paid in

July 2014 (all relating to the year 01 July 2014 to 30
June 2015)
† Letting agents fees of £500 paid in Sept 2014

… Calculate the property business profit assessable on

Miss Davis for 2014/15

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Solution to Question 2: Property Business profit computation
10
£ £
Rental income accrued: £6000 x 7/12 (06/09/14 – 05/04/15) 3,500
Add: Lease Premium received:
Gross Premium 5,000
less: Capital element: 2% x (10 – 1) (900)
Income element 4,100
7,600
Less: Allowable expenses:
Repair cost (disallow capital expense of £2,200) 1,800
Council tax (£6,000 x 9/12 i.e. 01/07/14 to 05/04/15) 450
Water rates (£360 x 9/12 i.e. 01/07/14 to 05/04/15) 270
Letting agent’s fees 500
W & T allowance 10% x 3,500 x (450 + 270) 278 – let on a furnished basis
(3,298)
Net Profit 4,302
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Rent-a-room relief
11

… Rent of £4,250 (gross) or less per tax year on a

room(s) in landlord’s main residence is exempt
… The rent-a-room relief gives an ‘alternative

basis’ if rent EXCEEDS £4,250 (instead of

normal property income basis): taxable on rent
in excess of £4,250 with no deduction for
expenses
† Note:
if deductible expenses exceed £4,250, the rent-
a-room election is NOT beneficial
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Rent-a-room relief
12

… However the rent-a-room election must be made

within 4 years of the end of the TY (e.g. 5 April 2019
for 2014/15) – and it remains in force until either
revoked or gross income falls below £4,250
… The rent-a-room relief is shared 50:50 if two persons
are entitled to rent-a-room income from the same
property (e.g. H&W) – with each person having a
separate right to make the rent-a-room election if
gross income exceeds £2,125 (i.e. 50% x £4,250)

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 3: Rent-a-Room
13

… Roger lets out a spare room in his principal private

residence to his lodger, Peter. During 2014/15,
Peter paid a weekly rent of £120 and Roger
incurred expenses of £5,100. Roger made a rent-a-
room election in 2008/09 which has not been
withdrawn.
… Advice Roger whether or not he should withdraw the
rent-a-room election

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Solution to Question 3: Rent-a-Room
14

WITH RENT-A-ROOM ELECTION: £

Gross rents accrued 6,240
Less: Exemption (if deductible exps exceed £4,250 election is not beneficial) (4,250)
Assessable profit 1,990

WITHOUT RENT-A-ROOM ELECTION:

Gross rents accrued 6,240
Less: deductible expenses (5,100)
Assessable profit 1,140

ADVICE: Rodger should withdraw the election for 2014/15 by 5th April 2019

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Furnished holiday lettings (FHLs)
15

FHA conditions:
… For a property to be treated as a FHL it must be (ALL):

† Let on a commercial basis; and

† Available for letting for > 210 days in the tax year; and

† Actually let for > 105 days in the tax year

† Not in longer term occupation for more than 155 days

during tax year (where longer term occupation is a
continuous period of more than 31 days during which the
accommodation is in a single letting i.e. same occupation)

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Furnished holiday lettings
16

… FHLs are treated in the same way like trades for many
income tax and CGT purposes:
† Capital allowances are available

† Income is treated as relevant earnings for pension

purposes
† Rollover relief, entrepreneurs’ relief and gift relief
are available for CGT purposes
But:
† Losses are only relieved by carrying forward against
future FHL profits

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 4: FHL
17

… Miss Jones lets two furnished properties, A and B during the

year ended 05 April 2015 as follows:
A B
Days Days
Lettings not exceeding 31 days each 200 150
Lettings exceeding 31 days each 120 165
Un-let (including 30 days when used
by landlord) 45 50
365 365
… Determine whether or not the two properties qualify as FHA in

2014/15
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Solution to Question 4: FHL
18

Property A:
(1) Available for letting as FHA for 200 + (45 – 30) = 215 days (> 210
days)
(2) Actually let as FHA for 200 days (> 105 days)
(3) Longer-term lets = 120 days (< 155 days)
Therefore it qualifies for FHA tax treatment
Property B:
(1) Available for letting as FHA for 150 + (50 – 30) = 170 days (< 210
days)
(2) Actually let as FHA for 150 days (> 105 days)
(3) Longer-term lets = 165 days (> 155 days)
Therefore it does not qualify for FHA tax treatment, failing (1) and (3)

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 5: FHL
19
… Mark owns a house in the UK which is let on a commercial basis
and satisfies the conditions as FHL for tax purposes. Relevant
details for 2014/15 are: £ £
Rents due and received 35,000
Allowable exps: Letting agency fees 5,000
Cleaning and repairs 2,500
Council tax 1,000
Water rates 250
Insurance 150
(8,900)
26,100
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Question 5: FHL
20

… Capital allowances on furniture and fittings for

the house amounted to £7,000 for 2014/15.
Mark and his family use the house themselves
for two months each year.
… Calculate the amount of property business profit

arising from the letting of the furnished holiday

accommodation in 2014/15 and state how the
amount will be shown in the income tax
computation
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Solution to Question 5: FHL
21

FHA business profit computation, 2014/15 £ £

Rental income accrued 35,000
Less: allowable expenses
Letting agent’s fees 5,000
Others (£3,900 x 10/12) 3,250
Capital allowances 7,000
15,250
Net Profit 19,750
The profit from the FHA will be shown as earned income in Mark’s
income tax computation
BRUCE NTEGE www.camstudies.org 20-Sep-15