The property allowance is essentially an additional personal allowance for income from property. It allows individuals to enjoy property income of up to £1,000 each tax year free of tax and without the need to report it to HMRC. Where income from property is more than £1,000, the allowance can be deducted instead of actual expenses. However, there are some exclusions.
Property income of less than £1,000
Where income from property is less than £1,000, it falls wholly within the allowance and as such does not need to be reported to HMRC. This is handy where a small amount of rental income is received in the tax year, for example, from letting out a drive for parking during Wimbledon, as it removes the administrative burden associated with reporting the income to HMRC.
However, if the income is less than £1,000 but expenses are greater than the income, it can be useful to report the loss so it can be set against future rental profits.
Property income of more than £1,000
Where property income is more than £1,000, the landlord has the option of deducting actual expenses in calculating the rental profit or deducting the £1,000 property allowance. Where actual expenses are less than £1,000, deducting the property allowance will provide a more favourable result.
Exclusions
Where a personal or family business is run from home, it is common for the company to pay rent for the use of the home office. However, the property allowance is not available where an individual receives a payment of rent made by or on behalf of a close company at a time when the individual is a participator in the close company or an associate of the participator. This means that where a person has a personal company, the property allowance is not available if rent is paid by the company to that person or to their spouse or civil partner.
Where a person or a person connected to them is a partner in a partnership, the allowance cannot be used against rent paid by (or on behalf) of the partnership.
The allowance is similarly not available if an employer pays rent an employee or their spouse or civil partner.
Further, the allowance cannot be used in addition to rent-a-room relief.
Looking ahead
The property allowance can provide a valuable tax saving for landlords with modest rental income, but the rules are not always straightforward. Choosing between claiming the allowance or deducting actual expenses can make a significant difference to your tax position, and the various exclusions mean it is not available in every situation.
If you are unsure whether the property allowance is right for you, professional advice can help ensure you claim the most beneficial relief while remaining compliant with HMRC requirements.
