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How does property income allowance work?

by | Mar 27, 2023

The property income allowance is fairly confusing if you don’t understand it and you should absolutely look into it if you want to save some additional money on your taxes for the year.

There are many regulations that landlords don’t necessarily stay on top of such as supplying tenants with a copy of the how to rent guide or not knowing how to rent to family and using the property income allowance is one of them.

While the property income allowance is not that big it is worth paying attention to for most business owners who have property. So, read on below to find out about the allowance or read here.

annual allowance on property income

What is property income allowance?

Are you aware that individuals who earn money from owning property or land and must report it to HMRC are eligible for a tax break? It’s known as the property income allowance, or simply the property allowance. This tax relief allows you to avoid paying tax on up to £1,000 per tax year.

What should you do if rental income is less than £1,000

First of all, it is worth noting that if your rental income is less than £1,000 you will not need to tell HMRC and you will then be able to keep 100% of the income made without doing anything. Simply collect your rental income and spend it how you like.

A real life example

For instance, if there is a property that is let out for a small amount of time in the year and perhaps £400 of monthly rent was charged during the months of february and march in order to bring the total for the tax year to £800.

This would result in there being no need to be paid because the property income allowance wouldn’t be exceeded. In fact, the landlord could still collect £200 of property income allowance tax free for the year.

What happens if rental income is more than £1,000

If you earn more than £1,000 in rental income in the upcoming tax year (2022/23), you have a choice when it comes to calculating your taxable rental profits. 

You can deduct the property allowance from your rental income instead of deducting your actual allowable expenses as this is something you must decide for yourself, but it is comforting to know that you have the option. 

The best option for you is determined by your financial situation because if you don’t have a lot of expenses, you may qualify for partial relief but if you have a lot of expenses, it’s probably best to claim actual expenses. 

However, if claiming actual expenses results in a rental loss, you should probably do so as well as it’s worth noting that if you use the property allowance, you won’t be able to claim any loss or deduction for actual allowable expenses.

An example in real life 

Assume David is an artist who occasionally rents out space in his studio to other artists. In the tax year in question, he earns £2,000 from renting out the studio and incurs actual expenses of £500.

Normally, he would have a taxable profit of £1,500 if he calculated his profit after deducting his expenses. If, on the other hand, he chooses to use the property allowance, his taxable profit is reduced to £1,000. In this case, this election is a good choice.

It is important to note that the property allowance is deducted from the total receipts for the property rental business, not from each individual property.

If your actual expenses exceed your rental receipts, you should not claim the allowance and instead keep the loss, which can be carried forward and set against future profits.

annual allowance on property income allowance

What are the type of properties covered by income allowance?

All properties that can produce a rental income are covered by the property income allowance as this is the allowance that is used for landlords who have property and are currently renting to tenants.

This includes property that is overseas and is in a property business as well as property that is a traditional residential or commercial letting.

Should you claim the property allowance?

It is up to you to decide whether it is worthwhile to claim the property allowance in the UK. The property allowance is a tax break available to those with annual property income of less than £1,000 per year so if you think this is a big number for your property business then certainly claim it.

If you have a low rental income and few expenses, taking advantage of the property allowance may be a good option for you because it simplifies your tax affairs and reduces your taxable profit. 

However, claiming actual expenses rather than the property allowance may result in a larger tax deduction if you have significant rental income and expenses so it may be best to focus on this instead.

It is critical to remember that claiming the property allowance precludes you from claiming any other rental expenses, such as mortgage interest or repairs.

 As a result, it’s always a good idea to consult with a solicitor to see if taking advantage of the property allowance is the best option for your particular situation.

Can you ever not claim the allowance?

There are a few situations where you cannot claim the property allowance like if you use the rent a room scheme to rent out a spare room in your home, you won’t be able to claim this allowance. 

Similarly, if you rent out your property to connected parties, you will not be eligible. It’s important to remember that you can’t claim this allowance if you’re also claiming mortgage interest. Instead, as a finance reducer, 20% mortgage interest relief is available.

Can you split the allowance?

When it comes to claiming the property allowance, you have the option to choose how it is divided between your various relevant property businesses if you happen to have more than one. For more on this click here.

What is a trading allowance?

Do you work for yourself? Maybe you’re just getting started or you’re doing something else to supplement your income. If this is the case, you may be eligible for the £1,000 tax break. It’s important to note that you must meet certain criteria in order to claim this allowance.

Similarly to the property allowance, you must notify HMRC of your source of income if it earns more than £1,000 per year. This implies that you must register for Self-Assessment. If you are a partner in a partnership, you will not be eligible for this allowance, so you must register for self-assessment regardless of your income.

The HMRC guidance on both of these allowances is quite detailed, laying out the conditions under which they can and cannot be used. Please read this thoroughly before making any decisions. The guidance also describes the types of records you’ll need to keep if you intend to use the trading allowance.

Before making any tax-related decisions, we always recommend seeking professional advice. Check out the link above if you want to feel more confident about your taxes. Also, if your gross income is less than £1,000, you will not be required to notify HMRC or pay any tax.

In summary

In conclusion, if you feel as though you are making the most of the property income allowance but you still aren’t able to. Also, as a landlord, make sure you speak to your tenants by providing them with a rent affordability calculator and giving them some ideas on how to live rent free.

tenant referencing

In conclusion

The article explains what tenant referencing entails, including the importance of tenant referencing, what documentation is required, and potential roadblocks that could prevent passing.

Further to this, landlords or letting agencies can no longer charge tenants for reference checks, and while it is not required by law to provide a reference, if one is provided, it must be accurate. The article also discusses what is looked for during tenant screening, such as proof of right to rent, employment or income, credit check, and previous landlord reference.

A guarantor may be required in some circumstances, but it is not a legal requirement. If a tenant reference fails, it is up to the landlord to decide whether or not the tenant is suitable.

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Donnell Bailey property expert

Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.

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