Meg Saksida looks at various categories of income from property and how they are taxed.
Some types of income from property are obviously classified as ‘property income’ for the purposes of income tax (e.g., rental income from the letting of a furnished or unfurnished residential or commercial property).
However, there are many other kinds of income generated from the exploitation of land or property in the UK that are not so obvious.
A trading business take precedence
If a property business exploits the land, it will usually be charged to property income rather than trading income; but this is not always the case. There is an exception where there is an overriding trade.
For example, ultimately a guesthouse exploits the land and property for income, as the trade of being a guesthouse takes priority, and as such, the income will be charged to trading income rather than property income. This is because of all the additional services a guesthouse provides. The taxpayer is not simply generating investment income by holding land.
Simply holding land, despite how much of the taxpayer’s time is devoted to the property business, will not convert the income into trading income (unless the property letting satisfies the conditions of a furnished holiday letting).
Differing lettings structures
Different rights attached to the use of the land do not matter when considering whether property income is taxable as rental income.
For example, the landlord can receive rent under a standard AST (assured shorthold tenancy), payments in respect of a licence to occupy, or otherwise use land or payments for the exercise of other rights over land, and they will all be charged as rental income. Whether the rent is for the building, the furniture inside it or for bare land, it will be taxable. Whether the property is used as a home, a filming location, or for any other activities, it is taxable.
Deposits and bonds
If using the accruals basis, the receipt of any deposit must be recognised according to generally accepted accounting practice (GAAP) and this means it will not be taxed until received in payment for some damage or loss. Usually, the cost of the associated expense should offset this income. If the deposit is not given back and not used to carry out repairs, it will be classified as income.
Under the cash basis, the receipts method is used, but as the law requires that these bonds are kept with an independent custodial scheme, legally, ownership does not pass to the landlord unless they become legally entitled to the deposit at the end of the tenancy, where it will be treated as per the accruals method.
Likewise, should the landlord receive any insurance payment due under a policy for arrears of rent, this is charged to property income.
Waste disposal on land
Allowing the ability to dispose of or bury waste products on land or ‘tipping rights’ is an activity associated with the landlord’s ownership of the land and, as such, is property income.
If this is only permitted to happen once, case law has shown that it may be classified as a capital receipt and hence chargeable to capital gains tax rather than property income, but this is only in cases where there is no possibility that the disposal of the waste could ever happen again.
Rent of the underlying land
Ground rents represent the cost of letting the land, not the structure on top of the land. These can thus be payable even when a home on the land is owned outright. On receipt, these are charged to property income.
If a tenant wishes to pay a lump sum to discharge the rent charge, the landlord will need to treat this sum as a capital sum and take account of it when the land is sold, under the capital gains tax regime.
Use for sporting activities
Income from the rights associated with sport on land is taxable to property income.
Examples include shooting rights, fishing rights, or simply charging to allow the taking or killing of game such as rabbits or deer.
Receipt of grants
Sometimes, landlords may find themselves eligible to local or central government grants. These are usually only offered to landlords who are prepared to take council tenants under certain conditions. This income will also be chargeable to property income.
Examples include contributions to payments for the repair of a let property, or to the cost of insurance against rent arrears.
Temporary structures
Rental income charged to property income is also applicable for receipts from allowing temporary structures such as caravans and houseboats to stay on the landlord’s land.
However, there is an Extra-Statutory Concession, which states that if the owner of the land is already running a business which constitutes trading, the lettings of the caravans which do not amount to a trade can be added to its trading receipts.
Charges for extra services
Occasionally, other services will be provided to tenants that are ancillary to the occupation of the property.
For example, a landlord living in the same block of flats may offer to provide laundry facilities or cook meals for the tenants. To determine if this is a separate trade or part of the letting, it will need to be determined whether the service goes “well beyond the services normally provided by a landlord”. Landlords would be expected to clean common areas, provide utility services and keep the premises in good repair. They are not generally expected to provide laundry services or meals. Any income they get from these separate services would need to be kept separate and declared taxable under the trade of cleaning or the trade of cooking meals. A single payment for rent and meals or laundry would need to be split so that each source of income is taxed under the correct classification.
Type of payment
As well as the type of activity carried out on the land, the method by which the landlord is paid is also relevant.
Receipts will be charged to property income whether they are received in cash or in money’s worth and payments-in-kind. A landlord that discounts the rent due to the fact the tenant does the garden in the property would need to declare the gross rent received, including the theoretical cost of the gardening.
Confusing areas
Although income from letting woodlands is property income, income from timber sales of commercially managed woodlands is not.
Where minerals, etc., are extracted from land, income from such mines and quarries, gravel and sand pits are trading income, not property income. Income from toll bridges and ferries is trading income.
Practical tip
In summary, property income derives from the exploitation of the land itself. Trading income, on the other hand, derives from what is carried out and done on the land. There are different rules for taxation purposes for the two different types of income, so it is crucial that income is categorised under the correct classification.
