Being self-employed is hard work, particularly when it comes to staying on top of your paperwork whilst trying to run your business. It can often be tricky filing tax returns and working out what you owe in Income Tax, National Insurance and other outgoings. Thankfully, government allowances can simplify this process and provide you with an easier way of recording your income from your property business and working out the tax you need to pay on it.
If you are self-employed, there are various tax-free allowances available for you to claim including the trading allowance and the property allowance. These have been available since 6 April 2017 for individuals who have trade or property income. If you have income from both property and trading, provided you meet the eligibility requirements you can claim both allowances.
In this article, we will specifically focus on the property allowance and everything you need to know about it as a landlord. This includes, what the allowance entitles you to, whether you are eligible to claim it, and frequently asked questions regarding the allowance and how it works. So, let's get stuck in!
What is the Property Allowance?
The Property Allowance is a tax exemption for individuals who receive income from property or land. The allowance means that if you are renting out a property or piece of land, you are eligible for a tax-free allowance of up to £1,000 for your annual gross property income. The aim of the Property Income Allowance is to simplify Income Tax obligations for landlords with small incomes from a property business and provide some certainty as to the amount of income that is tax-free.
The Property Allowance applies to property income from property businesses in the UK and overseas, as well as commercial and residential lettings (excluding rent a room businesses). If you have property both in the UK and abroad, you will still only be eligible for a single £1,000 allowance.
When it comes to working out how much taxable income you have, you can choose to deduct the £1,000 Property Allowance from your rental income, or alternatively, deduct eligible business expenses. It is worth working out which one is more beneficial to you as you may find that if you have a higher income and claim actual expenses, this reduces your taxable income more.
It is also worth noting that if you own two businesses and claim the Property Allowance for one, you will not be able to claim actual property business expenses for the other. Furthermore, you cannot use the Property Allowance on income received from letting a room when you have claimed rent a room relief.
The Property Allowance provides full relief from Income Tax if your overall income from property is less than £1,000 a year. This full relief also means that you do not need to declare tax owed to HMRC or file a Self Assessment tax return. When you use full relief, you will need to monitor your income to make sure it does not go over £1,000 during the year — if it does, you will then need to apply for Self Assessment.
If your income exceeds £1,000, the government legislation allows for partial relief. This means you will need to choose one of the following options:
- Deduct your actual expenses from your income in the usual manner, or
- Elect to use the £1,000 Property Allowance from your income
You will however not be able to claim any other expenses if you claim partial relief and deduct the £1,000 Property Allowance.
Each tax year you can choose whether to use the Property Allowance as an election only applies for a single year. If you choose to opt-out of the allowance, you must make an election for it to be not given by 31 January — you can do this on your Self Assessment tax return form.
You will not be able to claim the allowance in a tax year if you have any income from trade or property from:
- A company that is owned or controlled by you, or someone you are connected to
- A partnership where you or someone you are connected to is a partner
- Your employer or your spouse's employer
Additionally, you cannot claim the allowance if you:
- Claim the tax reducer for financial costs e.g. mortgage interest on a residential property
- Deduct expenses from income when you let a room in your home, instead of using the Rent a Room Scheme
You will not have to submit a Self Assessment tax return if your annual gross property income is £1,000 or less. If it is higher, you need to do one of the following:
- Contact HMRC if your gross property income is between £1,000 to £2,500
- Register for Self Assessment if your income from property is over £2,500
What records must I keep to claim the Property Allowance?
When you claim the Property Allowance, you must keep a record of your income. Records you may be required to keep are:
- Copies of invoices — can be paper or electronic
- Income receipts in a spreadsheet
- Emails that confirm any income you receive
- Statements from companies who pay you, showing the amount of money you received
- Bank statements
- Bank deposit records
- An appointments diary or book which details income received from each customer
It is your responsibility to keep your records in order and to make sure they are accurate, complete and readable — failure to do so can result in penalties from HMRC.
How do I work out the profits from my property income?
You are required to pay tax on profits you make from a rental property business. Your profit is the amount of money left once you have deducted any expenses or allowances that you are eligible for.
What are allowable expenses?
Allowable expenses are expenses that you can deduct from your rental income when you work out your taxable income from your property business. Allowable expenses are defined as being wholly and exclusively for the purpose of your property rental business. If you paid for them yourself, these can include:
- General maintenance and repairs, but not improvements
- water rates, council tax, electricity and gas bills
- Insurance, including building, contents and public liability insurance
- Cost of gardeners and cleaners
- Letting agency fees and management fees
- Accountant's fees
- Advertising fees when advertising for new tenants
- Direct costs e.g. phone calls or stationary
- Vehicle running costs — only for the running costs associated with your business
You will only be able to claim expenses if they are directly for your business. So, expenses such as private phone calls or clothing cannot be included in the deductions made from your taxable income. Additionally, you will not be able to claim expenses on maintenance that adds value or is an improvement to your property as it is not considered a repair — repairs simply return an asset to its original condition.
What if I own a property jointly with my spouse?
If you own a property jointly with your spouse, civil partner, or other individuals, you will each be eligible for the £1,000 allowance that will be applicable to your share of the gross rental income.
Can you claim for wear and tear on a rental property?
You can no longer claim for wear and tear when you rent out a fully furnished property, however, you may be able to claim tax relief on replacements for items that are considered domestic.
You are likely to be able to claim for the following types of domestic items:
- Movable furniture e.g. wardrobes and beds
- Furnishings e.g. curtains and carpets
- Household appliances
It is also worth noting that this only applies to replacements for items; you cannot claim tax relief when you buy items to furnish a property for the first time.
What happens if I sell the property?
When you sell or dispose of an asset such as a property, you may be eligible to pay Capital Gains Tax if you make a profit and the property has increased in value.
Disposing of an asset includes:
- Selling it
- Gifting or transferring it to someone
- Swapping it for another asset
- Getting compensation for it e.g. an insurance payout if an asset has been lost or destroyed
Assets eligible for Capital Gains Tax include:
- Most personal possessions worth £6,000 or more, excluding your car
- Property that is not your main residence
- Your main home if you have let it out or used it for business
- Shares that are not in an ISA or PEP
- Business assets
You do not have to pay Capital Gains Tax when you sell your home if all of the following apply:
- You have only one home which is your main residence and it has been for the whole time you have owned it
- You have not let part of it out
- You have not used part of your home for business purposes
- The grounds (including all buildings) are less than 5,000 square metres
- You did not buy it solely to make a gain
If all of these apply, you will be eligible for tax relief (Private Residence Relief). However, these stipulations do mean that if you sell your property or give a share of it to another individual (other than your spouse or civil partner), and one of these applies, you may have to pay Capital Gains Tax on overall gains above £12,300 — this applies to the gain you make, not the amount of money you receive.