MAKING DECENT RETURN from rental income is getter harder and harder due to tax legislation changes and increasing costs. However, there is a small tax allowance which may help you turn a loss into a profit – all potentially tax free.
When paying tax on property income, there is a £1000 property allowance which allows you to earn up to £1,000 tax free. This allowance can be used in various beneficial ways.
In today’s Shipleys Tax blog we explore the many ways you can use your £1000 property allowance and start to maximise your rental income in some circumstances.
If your income from property is less than £1,000, the property allowance allows you to receive that income free from tax. Where the income is covered by the allowance, you do not need to tell HMRC about it.
However, claiming the allowance may not be beneficial if your property income is less than £1,000, but your expenses are more than £1,000 so that you make a loss. Claiming the exemption will mean that the loss is lost. To preserve the lost, you must provide HMRC of details of your income and expenses on your tax return.
However, as the loss can only be set against future profits from the same property income business, if you do not expect future receipts to exceed £1,000, there may be little benefit claiming the loss. You may prefer instead to take advantage of the exemption, saving the work associated with establishing the loss.
Expenses less than £1,000
The property allowance can also be beneficial if your income from property is more than £1,000, but your expenses are less than £1,000. Where this is the case, you will not benefit from the exemption, but you can instead deduct the property allowance of £1,000 to arrive at your taxable profit. This will give a favourable result.
Wendy has income of £3,000 from letting a flat. Her associated expenses are £600. Under the normal rules, her taxable profit is £2,400.
However, she can claim the property allowance and deduct £1,000 rather than her actual expenses of £600. This reduces her taxable profit to £2,400.
Where a property is jointly-owned, each owner can benefit from the property allowance in respect of their share of the income. Where this is less than £1,000, the income is exempt and does not need to be reported to HMRC; where this is more than £1,000, the allowance can be deducted instead of actual expenses where this is beneficial.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email firstname.lastname@example.org.
Please note that Shipleys Tax do not give free advice by email or telephone.