Sarah Bradford explains the nature of the property allowance and explores the limitations on its use.
The property allowance is something of an easement in that it removes the need for individuals to report small amounts of income from property – and saves HMRC from having to collect small amounts of tax where the costs of collection outweigh the tax collected.
The property allowance (along with its counterpart, the trading allowance) was introduced with effect from the 2017/18 tax year. It was initially set at £1,000, and has remained at this level ever since.
An individual is only entitled to one property allowance each year, regardless of the number of sources of property income they have.
Nature of the allowance
Where ‘relevant property income’ from all sources is less than £1,000, it can be enjoyed tax-free and does not need to be reported to HMRC. This is known as ‘full relief’ and is useful where a taxpayer has small amounts of rental income (e.g., from renting a driveway during nearby events). An individual is only entitled to one property allowance, even if they have more than one property business or rental property.
If relevant property income exceeds £1,000, the individual has the choice of whether to claim the allowance and deduct that to arrive at their taxable property income (known as ‘partial relief’) or to deduct their actual expenses. The most beneficial option will depend on the circumstances.
If expenses are less than £1,000, it will generally be preferable to deduct the allowance, whereas if actual expenses are more than £1,000, it will be preferable to deduct the actual expenses. The aim is to take the route which gives the lowest taxable profit and, thus, the lowest tax bill. If the taxpayer wishes to deduct the allowance rather than their actual expenses, they will need to elect to do so. This must be done by the first anniversary of the normal self-assessment filing date of 31 January after the end of the tax year.
It should be noted that use of the allowance is optional, and it will not always be beneficial, even where property income is less than £1,000. If this is the case, but expenses exceed income, the individual may prefer to calculate the loss in the usual way so that it is available for relief in future years. However, where full relief would otherwise be available, the individual must elect for it not to apply. This must be done by the first anniversary of the normal self-assessment filing date.
Relevant property income
For the purposes of the property allowance, ‘relevant property income’ is the total of their relievable receipts from all their relevant property businesses. ‘Relievable receipts’ are simply the amounts that would be brought into account as a receipt of the property business for the tax year before taking account of any expenses.
A ‘relevant property business’ is any property business, other than one in respect of which rent-a-room relief is claimed.
Exclusions
The property allowance is not available where any of the individual’s relevant rental receipts comprise:
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receipts from a connected employer;
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receipts from a connected firm; or
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receipts from a close company.
Exclusion 1: Receipts from a connected employer
The property allowance cannot be set against rental receipts made by an employer or by their spouse or civil partner’s employer.
Exclusion 2: Receipts from a connected firm
Where an individual is a partner in a partnership, the property allowance is not available if their relevant property income for the year includes a payment made by or on behalf of the partnership. The exclusion also applies if the recipient is connected with a partner in the firm, as would be the case if the partner was their spouse or civil partner, a parent or grandparent or a child or grandchild.
This exclusion would bite, for example, if the partner worked from home and the partnership paid rent for the use of the home office.
Exclusion 3: Receipts from a close company
A further exclusion applies if rental income is received from a close company in which the participant is a participator or an associate of a participator in that close company.
Where a personal or family company is run from home or from other premises that the director owns, the company may pay rent to the director. This can be an option for extracting funds from the company without the need to pay National Insurance contributions. However, doing so will mean that the property allowance will not be available.
Partial relief computations
Where an individual only has one property business, the calculation of taxable profit where partial relief is claimed is straightforward. This will be the case if the person has either a UK property business or an overseas property business.
It should be remembered that a UK property business comprises all profits from UK land or property, even if they derive from different types of letting. For example, if a person has both a residential let and a furnished holiday letting in the UK, they only have one UK property business, even though different tax rules apply to the different types of lets.
A person will have two property businesses if they have lettings both in the UK and overseas – a UK property business and an overseas property business. Where this is the case, the decision whether to claim the property allowance, and where it is claimed how to allocate it, becomes more complicated.
Partial relief and one property business
Where an individual only has one property business, the calculation of taxable profit where partial relief is claimed is straightforward.
The first step is to calculate the total receipts for the relevant property business. The property allowance is then deducted from the total receipts to arrive at the taxable profit for the property business.
Example 1: Partial relief claim
Alison lives near a tube station and rents out her drive, making rental income of £6,000 a year. Her expenses are minimal, so she elects to claim partial relief, deducting the property allowance of £1,000, and reducing her taxable property profit to £5,000.
For 2023/24, the allowance must be claimed by 31 January 2026.
Partial relief and more than one property business
Where an individual has both a UK and an overseas property business, it is necessary to compute the total receipts from both businesses to see whether full relief is available. If the receipts are more than £1,000, the next step is to calculate the total expenses from both businesses to see whether it is worth claiming partial relief – it is not possible to claim relief for one business and calculate the profit in the usual way for the other.
If partial relief is worthwhile, the next decision is how to allocate the allowance between the two businesses.
Example 2: Allocating the property allowance
Jane lets out a beach hut in the UK and also a flat in France. In a tax year, she receives rental income of £900 from the beach hut and rental income of £4,000 from the flat.
She incurs expenses of £100 in relation to the beach hut and £800 in relation to the flat. As her total expenses are less than £1,000, it is beneficial for her to claim the property allowance.
She decides to set £900 of the allowance against the income from her UK property business (the beach hut), reducing the taxable profit to nil, and set the remaining £100 of the property allowance against her overseas property business (the flat), leaving her with a taxable profit of £3,900. She cannot deduct the expenses of £800 when calculating the profits for her overseas property business as she has claimed the property allowance.
Interaction with rent-a-room relief
An individual entitled to rent-a-room relief (either in full or by deducting their rent-a-room limit instead of expenses in calculating their profits) may elect for rent-a-room relief not to apply. Where this is the case, their profit or loss is calculated by deducting actual expenses from their rent-a-room receipts.
In this situation, it is not possible to claim the property allowance, as by disapplying rent-a-room relief (which is more beneficial anyway), the computation must be based on actual expense.
Practical tip
Before taking advantage of the property allowance, check that none of the exclusions apply and that the allowance is beneficial.
