The property allowance was introduced in 2017. It allows you up to £1,000 tax-free income from property as a simple alternative to claiming expenses in some circumstances. How does it work and when is it worth claiming?
Start date
After a false start two brand new tax-free allowances were introduced in April 2017; one for trading profits and one for income derived from property. In this article we’re considering only when and how you can use the latter.
Interaction with rent-a-room
The property allowance is only available to individuals, not companies. It also doesn’t apply to income from letting property which qualifies for rent-a-room relief. Even if you elect for rent-a-room relief not to apply you cannot then claim the property allowance. What’s more, if you can’t claim rent-a-room relief because your income exceeds the limit (£7,500 for 2020/21), you’re not allowed to claim the property allowance.
Tip. In practice there’s no reason why you would want to claim the property allowance in preference to rent-a-room relief as the latter is worth considerably more in tax savings. The restrictions in the rules are there just to block you from claiming both.
Other exclusions
The property allowance also can’t be claimed where the restriction (which took effect on 6 April 2017) on tax deductible loan interest and other costs used to buy or improve residential accommodation applies.
It’s not an Airbnb allowance
The press widely dubbed the property allowance as the “Airbnb allowance”, linking it to those people who let all or part of their homes to holidaymakers. That name is inappropriate and misleading because rent from an Airbnb type arrangement is likely to be excluded from the property allowance because either rent-a-room relief or the interest restriction rule will apply.
What does the property allowance apply to?
The property allowance applies to any sort of letting income apart from that which we’ve already mentioned. For example, rent from a parking space on your drive or your garage, or from a commercial property. In fact, where you receive rent that qualifies and is no more than £1,000 in a year, the property allowance automatically applies – there’s no need to claim it. Tip. If the total rent from all property (that’s not excluded) exceeds the annual £1,000 limit you can claim the property allowance as a deduction instead of the actual letting-related expenses you incur.
Naturally, you would only do this where your tax deductible expenses are less than £1,000. For example, if you first let a property in, say, March, at £1,800 per month, you might incur little or no expenses before the end of the tax year. You would be better off claiming the £1,000 property allowance.
Note. Anti-avoidance rules prevent the property allowance applying where the rent you (or your spouse or associate) receive is from your employer, a close company you’re a shareholder in or a partnership you’re a member of.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.