What is the Property Income Allowance?

The property income allowance, often referred to as the property allowance is a form of tax relief or exemption worth up to £1,000 per tax year.

Using the property income allowance can mean you receive up to £1000 worth of rental income free of income tax.

It’s available to individual landlords who receive earnings from property or land and can mean you don’t need to declare your property income on a self assessment tax return.

If you own a property in partnership with others each party has the opportunity to use the £1,000 property allowance from their portion of the total gross rental income.

Who can use the Property Income Allowance?

The property allowance can be used by most individual landlords against their total rental income from all properties.

The £1000 allowance is the maximum allowance given for all rental income and isn’t applicable on a per property basis (if you have more than one).

If you have self employed income (other than from property) the £1000 property allowance can potentially be used in combination with the self employed trading allowance.

For example if you are a sole trader and a landlord you can potentially qualify for both the property income allowance and self employed trading allowance at the same time.

How do I claim the Property Income Allowance?

The property income allowance is given automatically and HMRC does not expect you to complete a self assessment tax return to claim it.

You don’t need to inform HMRC that you are using the property income allowance or register for self assessment.

It’s recommended that you keep records (for example bank statements) of your property income and expenses just in case it is ever asked for at a later date.

When you can’t use the Property Income Allowance

There are restrictions to who can use the property income allowance mainly focused on income from other places.

In general the property allowance won’t be applicable if you earn business or property income from any of these sources:

  • Rent a room scheme: If an individual rents a room in their home under the rent a room scheme, the income generated from this does not qualify for property income allowance.
  • Company or partnership: Company or partnership owned or controlled by you or someone associated with you.
  • Your employer or your spouse’s/civil partner’s employer.

You can use our guide for landlords and income tax to find out more information and the government’s website also provides additional information about the intricacies of property income allowance.

When should I use the Property Income Allowance?

When your earnings from renting property surpass £1,000 you have the option to subtract either the actual costs or the £1,000 allowance from your rental income to calculate your taxable profit.

Should you opt to use the allowance it is necessary for you to formally choose this approach; if not then deducting actual expenses when figuring out your profit should be done.

The choice depends on which strategy offers more advantageous results for you.

For landlords with expenses worth more than the property allowance threshold (of £1000) claiming the allowance may not be in your best interest.

This is due to the fact that subtracting your actual expenses from your rental income will result in lower taxable profits (compared to using the property allowance) and means you can carry forward any losses to use against any future profits.

Property Income Allowance and record keeping

If you’re taking advantage of the property income allowance it’s mandatory to document your earnings.

HMRC needs you to retain various records, such as:

  • Duplicates of your invoices.
  • An organised spreadsheet maintaining a log of all income receipts.
  • Your bank statements with details regarding transactions and balances.
  • Bank deposit pay in records reflecting direct deposits made by tenants into your account.

Property income between £1000 and £2500

Normally if you are a landlord with an annual net property income over £2500 HMRC will expect you complete a tax return declaring your rental income and expenses.

Should your earnings from property lie between £1,000 (gross) and £2,500 (net) during one tax year HMRC expect you to consult with them about whether declaring the income on a tax return is necessary.

HMRC will make a decision and let you know if you need to register for self assessment to declare your rental income.

How do I contact HMRC about my rental income?

HMRC can be contacted about the property income allowance or if you have gross rental income between £1000 and £2500 on 0300 200 3300.

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