The property income allowance allows you to earn a small amount of rental income tax-free each year. It is useful where the rent-a-room scheme does not apply (which is limited to the letting of furnished accommodation in your own home), and removes the need to report small amounts of rental income to HMRC.
The property allowance is set at £1,000 per tax year.
Where the rental income received in the tax year is less than £1,000, the income is not charged to tax (unless you elect otherwise). The income does not need to be reported to HMRC and can simply be ignored for tax purposes.
Ceri lives near a popular concert venue and lets out a parking space on her drive. She earns rental income for the tax year of £640. As this is less than the property allowance, it is not charged to income tax and she does not need to report it to HMRC.
Where rental income exceeds £1,000, you can choose how you want to be taxed. You can deduct either your actual expenses or the £1,000 allowance from your rental income to arrive at your taxable profit.
If you decide to deduct the allowance, you must elect for this treatment to apply; otherwise you should deduct actual expenses when calculating your profit. You can choose which gives the best result.
David is an artist and sometimes lets out space in his studio to other artists. In the tax year in question, he receives rental income from letting the studio of £2,000. His actual expenses are £500.
Calculating his profit in the usual way by deducting expenses would result in a taxable profit of £1,500. However, if he elects instead to deduct the property allowance, his taxable profit is reduced to £1,000. In this case an election is worthwhile.
Where the allowance is deducted, it is deducted from the total receipts for the property rental business, rather than on a property-by-property basis.
However, if actual expenses exceed your rental receipts, it is better not to claim the allowance and preserve the loss, which you can carry forward to set against future profits.
If you have more than one relevant property business and want to claim the allowance, you can choose how it is split between your different property rental businesses.
Partner note: ITTOIA 2005, ss. 783B – 783BQ