The property allowance is a useful allowance that allows you to earn property income of up to £1,000 tax-free each tax year. If your income from property is more than this, you can deduct the allowance instead of actual costs where it is beneficial to do so. Claiming the allowance is optional and will not always be beneficial; whether it is or not will depend on your circumstances.
Annual property income of £1,000 or less
If your gross annual property income is £1,000 or less in a tax year, it will fall within the property allowance. This means that you do not need to tell HMRC about it or declare the income on your tax return if you need to complete one for other reasons. It should be noted that the relevant figure is your gross property income (i.e. before deductions for expenses), and this, rather than your profit, must be £1,000 or less to benefit from the relief in full.
If your expenses are more than your rental income so that you have made a loss, claiming the relief will not be beneficial if your income is likely to exceed £1,000 in the future and you expect to make a profit. Instead, it is better to declare the income on your tax return to preserve the loss so that it can be set against any future profits that you make that would otherwise be taxed. You will need to elect for the allowance not to apply by the first anniversary of the normal self-assessment filing date of 31 January following the end of the tax year to which it relates (so by 31 January 2026 for 2023/24). The election can be made in your tax return.
Annual property income of more than £1,000
You can still benefit from the allowance if your gross annual property income is more than £1,000 by opting to deduct the allowance rather than your actual expenses. This will be beneficial where your deductible expenses are less than £1,000 as this will reduce your taxable profit. Claiming the relief will mean that you cannot deduct your expenses or claim an income tax reduction in respect of any interest and finance costs.
In this instance, you will need to tell HMRC. The mechanism for doing this will depend on the amount of your income and whether you need to complete a tax return for other reasons. If you have to complete a tax return anyway or your gross property income for the tax year is more than £2,500, you should declare it on the property pages of your Self Assessment tax return. However, if your income is between £1,000 and £2,500, you should contact HMRC on 0300 200 3300 to discuss your situation.
If your wish to claim the allowance (partial relief) you will need to elect for this treatment to apply. Again, this must be done by the first anniversary of the normal self assessment filing date of 31 January following the end of the tax year to which the election relates.
Interaction with rent-a-room relief
Rent-a-room relief allows you to earn up to £7,500 a year tax-free (or £3,750 per person when more than two people share the income) if you rent one or more furnished rooms in your own home. You cannot claim both rent-a-room relief and the property allowance. However, if you qualify for rent-a-room relief, this is more beneficial than the property allowance and should be claimed instead.
Exclusions
The property allowance cannot be set against rent paid by an employer, or by the employer of an individual’s spouse or civil partner. Where the recipient is a partner in a partnership, the property allowance is similarly not available for rent paid by the firm. Likewise, the allowance cannot be used against rent paid by a close company to a participator or to an associate of a participator, precluding, for example, the use of the allowance against rental income from a close company for use of a home office.
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