Meg Saksida explains the circumstances where this valuable tax relief is available and beneficial.
For the larger landlord, with a number of properties and significant property income, the property allowance will not be of interest. Even if the landlord taxpayer only has one property let out, it is likely that the expenses in maintaining that property for rental will exceed £1,000 a year.
How does the property allowance work?
However, for the landlord with a small amount of property income and associated expenses, the property allowance can save up to £450 in income tax (i.e., £1,000 @ 45%).
The property allowance is an automatic application of deductible expenses of up to £1,000 per tax year for certain property income.
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Relevant property income less than £1,000
If the landlord has ‘relevant property income’ of £1,000 or less, if they choose to use the property allowance, they will not pay tax on this income. In addition, the landlord does not need to make HMRC aware that they have earned this income. This is because HMRC will automatically assume they have used the property allowance to cover this income, leaving them with taxable income of nil.
The property allowance is perfect for those taxpayers who are exploiting land in a small way. A common example might the landlord of a garage or a small allotment or other little parcel of land.
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Relevant property income more than £1,000
If the landlord has ‘relevant property income’ of more than £1,000, it still may be potentially beneficial to use the property allowance. This is because it is an automatic application of expenses of up to £1,000.
If the landlord’s expenses are under £1,000, even if the income is over £1,000 it will still be worth electing for the property allowance to get the tax deduction on the difference between the actual expenses incurred and £1,000.
Relevant property income
‘Relevant property income’ is the gross amount of income the taxpayer receives due to the exploitation of the land.
No expenses can be deducted when considering the amount of the relevant property income.
Rent-a-room scheme users
There are specific provisions already in place for those landlords who are part of the rent-a-room scheme and, as such, the income from property is not relevant property income for the property allowance for these taxpayers. This is true even if the income qualifies for the rent-a-room scheme, but the taxpayer chooses to be taxed on the normal income-less-expenses basis.
Other sources of income that are not relevant property income
If the taxpayer has moved from the cash basis to the accruals basis, there may be adjustment income being charged. Relevant property income will not include this adjustment income when determining the £1,000 limit.
If the taxpayer is a participator in a close company, and it is the income from the close company that has been generated from property income, the property allowance is unavailable. This is the same for partnership income received, even if it is generated from letting.
Likewise, income from the taxpayer’s (or their spouse or civil partner’s) employment is not eligible for the property allowance.
These rules ensure that taxpayers cannot deliberately (and sneakily!) create income on which they can use the property allowance. For example, suppose an employee works from home once a week. They could charge their employer rent for the home office they are using at £1,000 a year, at the same time getting their employer to reduce their salary by £1,000. The salary would have been taxed as normal, but without the restriction on employee income not being eligible for the property allowance, they would not have had to have paid tax on the £1,000 rent due to the property allowance. This practice is banned.
Residential property lets and interest
Care should also be taken for those landlords with residential property who are subject to the interest restriction where there is a deduction for the interest at basic rate through a tax reducer. The property allowance will not be available in these cases.
For these taxpayers, a decision will need to be made determining whether it is worth claiming the tax reducer for the interest or the property allowance.
Election for the allowance
The property allowance is only automatic if the property income is under £1,000. An election to use the property allowance rather than the actual expenses must be made by the end of January, a year after the 31 January following the tax year.
For example, if a landlord wanted to use the property allowance in 2023/24, they would need to have elected to use it by 31 January 2026. Once an election is made, it does not have to continue every tax year. An election may be made in one year and not in the next.
Jointly held property
If the land asset generating the property’s gross income is held jointly, each individual joint owner taxpayer must make their own decision as to whether they will personally benefit from the property allowance.
Example: Renting out the garage
Mario owns a house with a garage in central Bristol but he does not own a car. He lets the garage to commuters at £1,700 a year in 2023/24. The garage door needed repainting, which he contracted to have done during the tax year at a cost of £200. He also lets out his spare room to a lodger, earning £4,000 in 2023/24. His expenses associated with the spare room were £350 in the tax year.
Due to the level of Mario’s income and expenses on his spare room, he will undoubtedly use the rent-a-room scheme on this and, as such, the income from the lodger will not be relevant property income for the property allowance. He will have no income from the lodger taxed due to that scheme.
However, the garage income is relevant property income for the property allowance. As the level of income is above £1,000, he will need to elect to use the property allowance, but if he does this, he will only be taxed on £700 (i.e., £1,700 less the £1,000 property allowance) and not £1,500 (i.e., £1,700 less the actual expenses of £200), saving him up to £360 in income tax (i.e., £800 income not taxed @ 45%).
Note that if Mario’s income from the lodger was above £7,500 (e.g., £10,000), meaning that even if he opted for the rent-a-room scheme he would still have had £2,500 to pay income tax on, he would not be able to use this £2,500 as relevant property income for the property allowance.
Practical tip
Given that property can be held jointly, it may be advantageous for spouses and civil partners earning a small amount of income on property to share the ownership such that they can both be eligible to the property allowance. For example, if an individual is letting out an allotment to a local neighbour earning gross income of £1,800 a year with no expenses, that individual taxpayer will be chargeable to income tax on £800 after having elected for the property allowance. If the owning partner were to transfer half of the land on a no-gain, no-loss basis to their spouse or civil partner, each partner would have gross income of £900, meaning the property allowance would apply automatically and neither would be chargeable to income tax on the letting of the allotment; nor would they even need to declare the income to HMRC.
