The property allowance enables 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. This provides opportunities for individuals to earn some tax-free income by letting out their drive where there is an event nearby or letting out their house while on holiday. However, the allowance cannot be used to shelter rent received from a personal or family company for the use of an office in the director’s house.
If total rental income received in the tax year is less than £1,000, there is no tax to pay and the income does not need to be reported to HMRC. The property allowance is available in addition to other allowances such as the personal allowance, the trading allowance, the personal savings allowance and the dividend allowance.
It is also possible to benefit from the property allowance if rental income in the tax year is more than £1,000. The landlord has the option of deducting the £1,000 property allowance rather than their actual expenses when calculating their taxable rental profit. This will be beneficial if actual expenses are less than £1,000.
Where rental income in the tax year is more than £1,000 it has to be reported to HMRC. Currently, the rental income and any associated expenses must be reported on the Self Assessment tax return. However, HMRC have announced that they plan to increase the threshold for reporting property income on the Self Assessment tax return to £3,000 before the end of the current Parliament. While rental income in excess of £1,000 will still need to be reported to HMRC, taxpayers will instead be able to use a new digital service to do so rather than filing a Self Assessment tax return. Where the landlord needs to file a Self Assessment tax return to report other income, they will still be able to report property income in the return – use of the new digital service will be optional.
Where rental income is more than £1,000, the associated rental profit is taxable. If rental income is less than £1,000 but the landlord makes a loss, they may prefer to report their income to HMRC to preserve the loss rather than take advantage of the property allowance.
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