ACCA F6 FA09 Study Text 2010

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Paper F6 (UK)

Taxation FA2009

CHAPTER

Income from property

Contents

1 Income derived from land and buildings in the

2 Premiums

Paper F6 (UK): Taxation FA2009

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Income derived from land and buildings in the UK

 The scope of the syllabus

 Rental income

 Nominal rent leases

 Furnished holiday lettings

 Rent-a-room relief

1 Income derived from land and buildings in the UK

1.1 The scope of the syllabus

UK property income rules assess income receivable from land and buildings

situated in the UK.

There are three key sources of property income:

 Rental income

 Lump sum premiums received on the granting of short leases, and

 Dividends from REITs. (These were covered in the previous chapter).

1.2 Rental income

Rental income receivable is assessed on an individual as ‘other income’ on an

accruals basis of assessment.

A single assessment is made on the net profits of all properties let by the individual,

as if there is one property business with a year ended 5 April each year.

Rental income therefore assesses rents receivable and expenses incurred in the tax

year; the actual dates of receipt of income and payment of expenses are not relevant.

To calculate the rental income assessment:

 all income accrued from any rental property is pooled, and

 all allowable revenue expenditure incurred wholly and exclusively in relation

to the rental properties is deducted.

The rental income assessment is therefore the overall net profits of all properties

rented by that individual.

However, there are two exceptions to this rule. Profits/losses derived from the following

properties are not pooled with the other properties but are calculated separately:

 ‘furnished holiday lettings’, and

 properties let at a nominal rent.

These are considered in detail in later sections of this chapter.

Chapter 3: Income from property

The proforma computation shown below can be used to calculate the rental income

assessment for an individual.

(W) UK property income

Rents accrued in the tax year

Less Allowable revenue expenses (see Notes 1 to 3 below)

Accountant’s fee X

Agent’s management fees, advertising X

Council tax, water rates X

Gardener’s wages, cleaner’s wages X

Insurance for the property X

Insurance for the contents (if furnished) X

Repairs X

Painting and decorating X

Debts written off (see Note 4 below) X

Interest on loans in relation to the property (see Note 5 below)

(X)

Less Wear and tear allowance (if furnished) (see Note 6 below)

10% × [rents received – council tax]

(X)

Property income assessment

Notes

(1) Allowable expenses must be incurred wholly and exclusively for the purposes

of the property letting business and must be revenue, not capital, in nature.

(2) Allowable expenses include expenditure incurred in the seven years pre-

letting, provided the expenses would normally be allowed if incurred whilst

letting property.

(3) Expenditure is allowable if the property is available for letting. Therefore

expenses are allowable if incurred while the property is empty (e.g. repairs

carried out in between old tenants moving out and new tenants moving in).

However, if the owners occupy the property at any time, expenses are not

allowable if incurred while the property is occupied by the owner. It may be

necessary to time apportion some expenses and only allow those incurred

while the property is available for letting.

(4) Outstanding rents which are no longer recoverable (for example, due to a tenant

leaving with no contact details and without paying) are an allowable deduction.

(5) For income tax, interest payable on any loan taken out to purchase or improve

the property (including incidental costs of obtaining the loan finance and any

bank overdraft interest in running the property business) is an allowable

expense against the rental income.

(6) The wear and tear allowance is a tax allowance for the furnishings provided in

a property, and therefore only applies to properties let furnished. Alternative

allowances may available (see below).

Relief for capital expenditure

The general rule that capital expenditure is not an allowable deduction in

calculating the property income assessment applies to all property which is let.

Paper F6 (UK): Taxation FA2009

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If the property is non-residential (e.g. offices, warehouse):

 Capital allowances are available for plant and machinery provided with the

property in the normal way.

However, if the property is residential (e.g. a dwelling house or flat):

 Normal capital allowances cannot be claimed.

 An alternative relief known as the renewals basis is available, but this only

allows relief for the cost of replacing furniture to the same standard. No relief is

available for the original cost of the furniture or any improvement costs. No

relief is available for any plant and machinery provided with the property.

 In practice, the wear and tear allowance is usually claimed instead of the

renewals basis. In an examination question, always give the wear and tear

allowance unless the question specifically refers to the alternative allowance

available.

UK property income losses

If the allowable revenue expenses exceed the rents accrued on all properties pooled

together, an overall net loss arises.

In this case, for income tax purposes:

 the UK property income assessment for the tax year is £Nil, and

 the loss arising can only be carried forward and set against future UK property

income.

Example

Hannah rented out two properties in 2009/10: Nos. 47 and 49 St. Peter’s Boulevard.

No. 47 is a furnished property which Hannah purchased several years ago. It was let

all year at a rent of £2,500 per month.

No. 49 was purchased on 1 January 2010. It was immediately let on a six month

agreement as unfurnished property at a rent of £1,800 per month. In order to

purchase the property, Hannah took out a £100,000 bank loan on 1 January 2010, at

a fixed mortgage interest rate of 9% pa.

The following additional expenses relate to 2009/10:

No. 47 No. 49

£ £

Advertising for new tenants Nil 920

Estate agent management fees 2,440 740

Council tax 860 150

Insurance 1,100 160

Repairs

3,200 Nil

Extension 15,000 Nil

Required

Calculate Hannah’s property income assessment for 2009/10.

Chapter 3: Income from property

Answer

Hannah’s property income – 2009/10

£ £

Rents accrued in 2009/10 (£2,500 × 12 ) + (£1,800 × 3)

35,400

Less Allowable expenses

Advertising

920

Agents’ management fees (£2,440 + £740) 3,180

Council tax (£860 + £150) 1,010

Insurance (£1,100 + £160) 1,260

Repairs 3,200

Extension (capital and therefore not allowable) Nil

Interest on loan to purchase No.49 (£100,000

3/12)

2,250

––––––––––––––––––––––––––––––

(11,820)

Wear and tear allowance (furnished property only)

10% × [rents – council tax]

10% × [(£2,500 × 12) – (860)]

(2,914)

––––––––––––––––––––––––––––––––

Property income assessment

20,666

––––––––––––––––––––––––––––––––

1.3 Nominal rent leases

A nominal rent lease (also known as a non-commercial lease) is where a property is

let but the tenant is not charged the full market rent; only a small nominal rent is

charged or no rent is charged. These arrangements usually occur when a landlord

lets property to members of his family.

If a property is not let at a full commercial rate:

 The property is not pooled with other properties, but separate records are kept

 The rents receivable under the lease are taxable as property income in the

normal way, net of expenses incurred

 A portion of the expenses will not be allowed on the grounds of not being

wholly and exclusively incurred for the purposes of the business (e.g. if the rent

charged to the relative is 30% of the normal commercial rent, only 30% of the

normal allowable expenses will be allowed)

 Expenses will only be allowable up to a maximum of the rents receivable (i.e. no

allowable loss can arise on nominal rent leases).

1.4 Furnished holiday lettings

Income from FHL is assessed separately from other UK property income and

treated as earned income, not investment income.

Therefore, profits of FHL are:

 not pooled with other UK property income

 treated as if profits of a separate trade

Paper F6 (UK): Taxation FA2009

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 assessed using the trading income assessment rules, not the property income

rules, and

 included in the income tax computation in the first section as earned income along

with employment income or other trading income, not as other investment income.

There are several key advantages in treating the income as earned income as

opposed to investment income as outlined in the table below.

Tax

Advantage

Income tax

 instead of a wear and tear allowance or renewals basis, normal capital

allowances are available on all plant and machinery, including fixtures,

fittings and furniture

 if a loss arises, relief is available under the trading income rules (see

later) rather than the property income rules which only allow the carry

forward of relief against future property income

 the profits are treated as net relevant earnings for personal pension

relief purposes

Capital

gains tax



the property is treated as a business asset rather than an investment

asset, therefore the following reliefs are available:

−

Rollover relief

− Gift relief

However, property income can only be treated in this way if the property satisfies

the definition of furnished holiday lettings.

To be treated as FHL all of the following conditions must be satisfied:

 the property is situated in the European Economic Area, and

 is furnished, and

 is let on a commercial basis with a view to making profits, and

 is available for letting as holiday accommodation for at least 140 days in the tax

year, and

 is actually let for at least 70 days in the tax year, and

 is not normally occupied for periods of longer-term occupation (i.e. more than

31 consecutive days to the same person).

If an individual has more than one property, a property may be treated as a FHL if it

fails the 70 day test provided the average number of days letting for all properties is

at least 70 days.

If the property is let continuously to the same person for more than 31 days, and the

total of all periods of longer-term occupation exceeds 155 days in any 12 month

period, the property will not be treated as a FHL.

Chapter 3: Income from property

1.5 Rent-a-room relief

Where an individual rents out furnished accommodation which is part of his main

residence (e.g. rents a furnished bedroom in his house or flat to a lodger), any rental

income receivable is assessed to income tax as property income. However, rent-a-

room relief is available.

The relief operates as follows:

Gross rental income

(before expenses

and allowances):

Property income assessment

If a loss arises

£4,250 or less

Nil – the income is exempt No allowable loss arises

unless an election is made

for a normal property

income loss to arise

The election:

 must be made within 12

months after 31 January

following the end of the

tax year

 is only valid for the tax

year of that loss

More than £4,250 Lower of:

 Normal property income

assessment

 (Rents accrued less £4,250)

but only if an election is

made

Normal property income

loss arises

The election:

 must be made within 12

months after 31 January

following the end of the

tax year

 is binding until revoked,

or gross rents accrued are

£4,250 or less.

Note that the limit of £4,250 is halved to £2,125 if the income received from letting

the room is shared with any other person(s).

Example

Ivor rented a furnished bedroom in his Victorian house to a lodger for the whole of

2009/10.

Required

Calculate Ivor’s property income assessment for 2009/10 assuming following four

different situations:

Paper F6 (UK): Taxation FA2009

Rental income

Allowable expenses including

wear and tear allowance

(a) £500 per month 3,260

(b)

£500 per month 5,260

(d) £335 per month 5,260

Answer

Ivor’s property income assessment – 2009/10

(a)

Gross rents exceed £4,250 No

election

With

election

Gross rents accrued (£500

12)

6,000

Less Allowable expenses/Rent-a-room relief

(3,260)

(4,250)

Assessed on the lower of

2,740

1,750

Ivor will be assessed on £1,750 but only if he makes an election by 31 January

2012 for the rent-a-room relief to apply. The election will remain in force until

revoked by Ivor or until the gross rents in the future are £4,250 or less.

(b)

Gross rents exceed £4,250 No

election

With

election

Gross rents accrued (£500

12)

6,000

Less Allowable expenses/Rent-a-room relief

(5,260)

(4,250)

Assessed on the lower of

740

1,750

Ivor will be assessed on £740 automatically. He will not wish to make the rent-

a-room relief election.

(c)

Gross rents less than £4,250

Gross rents accrued (£335 × 12) = £4,020

Expensesarelessthantherentsaccrued;thereforeaprofitismadebutis

exemptundertherent‐a‐roomreliefprovisions.

Property income assessment is £Nil.

(d)

Gross rents less than £4,250 No election With

election

Gross rents accrued (£335

12)

No allowable

4,020

Less Allowable expenses

loss arises

(5,260)

Allowable loss

(1,240)

Chapter 3: Income from property

Ivor will not be eligible for an allowable loss unless he makes an election for

the normal property income loss of £1,240 to arise. He must elect by 31

January 2012 and the election is valid for 2009/10 only.

Paper F6 (UK): Taxation FA2009

Premiums

 Premiums received on the granting of a short lease

 Granting a sub-lease

2 Premiums

2.1 Premiums received on the granting of a short lease

A premium is a lump sum received by the landlord at the start of the lease in return

for giving the tenant the exclusive right to use the property for the duration of the

lease. When the lease terminates, the property reverts back to the owner.

A property income assessment arises on both:

 the premium received at the start of the lease, and

 the rent receivable on a monthly or quarterly basis for the actual use of the

property.

The key points to remember are as follows:

 An assessment only arises on the granting of a short lease.

 A short lease is defined as a leasehold interest of not more than 50 years in

duration.

 The assessment on the premium received is calculated as follows:

Premium received X

Less 2% × premium × (n – 1)

(X)

Property income assessment on the landlord X

where: n = number of years of the lease

 The number of years of the lease runs from the start of the lease to the earliest

date on which the lease may be terminated by either the landlord or the tenant

under the terms of the lease.

Example

Jacob owns a warehouse which is surplus to his requirements. Rather than selling

the warehouse, Jacob granted a 35 year lease on the property to Karen on 1 October

2009 for a premium of £65,000. Jacob charges rent of £5,000 pa payable in advance on

a quarterly basis starting on 1 October 2009.

Required

Calculate Jacob’s property income assessment for 2009/10.