What are the tax regulations on income acquired from property and furnished holiday lettings in a business formation of Great Britain?


10 Dec

The blog involves the discussion of the taxation of income which occurs as a result of letting of property in the UK. The basis of assessment of such income is brought into consideration in the article and the computation of assessable losses and profits is taken into account. The main topics that will be discussed include profits from a property related to business formation UK in the country, losses of business of property in the UK, premiums on leases, premiums paid by the traders and the real estate investment trusts (REITs). Finally, the furnished holiday lettings in the UK will be explained for the convenience of readers.

Property Business in UK

Profits from a Property Business

The computation of the income from a property related to business formation UK is done for the years of tax on an accruals basis.

The taxation of income acquired from buildings and land in the UK, which includes houseboats and caravans that are held stationary, is done in the form of non-savings income.

The treatment of a taxpayer or a partnership with the rental income of United Kingdom is done in the form of a running business after the business name registration UK, as their property business in UK. The pooling of all the rents and expenses of property is done, in order to yield a single loss or profit. The computation of losses and profits is done in the same way as the computation of profits of trade is done for the purposes of tax, on an accruals basis.

The expenses will often involve payable rent when a landlord himself is giving the land on rent, that he in response, lets to the sub tenants. As far as the individuals are concerned, the interest on loans to purchase or improve the properties is considered as an expense on an accruals basis. The rules on the receipts of post-cessation and expenses are applicable to the property businesses in the United Kingdom in a similar manner as they are applicable to the traders. The relief is found for irrecoverable rent in the form of an impairment loss.

The capital allowances are provided on the machinery and plant used in the property businesses of the United Kingdom in a similar manner as they are provided for a business of trade after business name registration UK, with a date of accounting of April 5. Normally, you will not find the availability of capital allowances on the machinery or plant being used in a dwelling. Since a taxpayer who lets furnished property cannot make a claim of capital allowances on the furniture, he/she can rather make a claim of a wear and tear allowance.

According to such a claim, the actual price of the furniture is overlooked and rather, an annual subtraction is provided of a 10% rents. First, the rents are decremented by amounts whose payment has been made by the landlord but in normal conditions, they are a burden on the tenant. These amounts involve any rates of water and council tax whose payment has been made by the landlord.

If the machinery and the plant are brought underutilization partly in a dwelling house and partly to fulfill other purposes, then a reasonable and just apportionment of the expenditure can be done in order to determine the available capital allowances.

Losses of Property Business

A loss suffered from a property related to business registration UK is carried forward to set against the future profits from the property related to business registration UK. It might be carried forward till the ending of the property business UK, but it should be brought under usage as soon as possible.

Leases and Premiums

The taxation of the portion of the premium acquired on the grant of a short lease is done in the form of a rent. Whenever an acquisition of a premium or similar consideration on the grant (by landlord to a tenant) of a short lease (50 years or less) takes place, then part of the premium is considered as the rent acquired in the grant year. It is considered that a lease will end on the date when it is most likely to terminate.

The premium whose taxation is done in the form of a rental income, is said to be the whole premium, minus 2% of the premium for every complete year of lease, excluding the first year. The rule, however, is not applicable on the assignment of lease (i.e. one tenant making the sale of their whole interest in the property to some other person).

Payment of Premiums made by the Traders

In the case where a trader makes the payment of a premium for a lease, he/she may subtract an amount from his/her taxable profits liable to tax in every leasing year. The amount to be subtracted is the figure considered as rent acquired by the dividend of landlord by the number of the leasing years.

Example of Subtraction of the Premium Paid by Trader

Consider an example, that on July 1st 2013, a trader named Bryony, makes a payment of the premium of £30,000 to a trader named Scott for a lease of ten years on a shop. Each year, Bryony makes up accounts to December 31st.

Scott has to make the payment of tax on property income in the years of 2013 and 2014 equivalent to an amount of £30,000 – (£30,000 * (10-1) * 2%) = £24,600.

Hence, Bryony can subtract £24,600/10 = £2460 in every year of the 10 leasing years. She commences with the year of accounts in which the lease starts (year finished December 31st 2013) and divides the relief to the nearest month. Her subtraction for the year terminated on December 31st 2013 is hence: July 1st 2013 to December 31st 2013: 6/12 * £2460.

Companies Operating as Real Estate Investment Trusts (REITs)

The companies of property may hold their operation in the form of Real Estate Investment Trusts (REITs). The REITs can make an election for their income and gains acquired from property to be excluded from the corporation tax and should withhold the basic rate of 20% tax from the distributions whose payment is made to the shareholders who cannot be the owners of more than 10% shares of a REIT, out of these profits. The taxation of these distributions is done in the form of income acquired from property, and not in the form of dividends.

The taxation of the dividends by REITs out of other income (i.e. not gains or property) is done as dividends in the normal manner.

Furnished Holiday Lettings (FHLs)

Some special rules are applicable to the income received from the furnished holiday lettings. Whilst the taxation of income is done in a normal way as the income from a property business, the treatment of the letting is done in the form of a trade. The capital allowances can be found on the furniture and then the income is relevant earnings for the purposes of pension. However, only the relief of carry forward trade loss is available.

There exist special rules for the furnished holiday lettings (FHLs). The treatment of letting is done as if it were a trade which means that although the taxation of income is done from a property business, the provisions which are applicable to the actual trades are also applicable to the furnished holiday lettings.

  • The income received from a business of furnished holiday lettings in the UK qualifies as the relevant earnings for the relief from pension.
  • The capital allowances are available on furniture rather than the 10% allowance of wear and tear.
  • The relief of capital gains rollover, gifts of assets of business and the entrepreneur’s relief are available.

However, the losses from FHLs are not considered as the losses of trade for relief against the general income, relief of terminal loss and the early years’ loss relief. If a loss is seen to occur on a FHL, then the only relief for trade loss available is the carry forward loss relief by subtraction from the future profits of the FHL available first. The reliefs for losses of trade are not a part of the article’s scope.

However, it should be noted that the basis period rules for trades are not applicable, and the computation of the losses or profits should be done for the years of tax.

The situation of a FHL must be in the UK or in some other state within the European economic area. There should be distinct calculations for a business of furnished holiday lettings in the UK and the business of EEA furnished lettings, which comprises of lettings in one or multiple EEA countries apart from the Great Britain.

The letting should be of a furnished accommodation which is made on the commercial grounds with a realization of profit view in mind. The property must also satisfy the three conditions mentioned below:

  • The condition of letting: During the relevant duration, the letting of this accommodation is done commercially as the holiday accommodation to the public members for at least a number of 105 days (any days that are longer term occupation are excluded from the days let).
  • The condition of pattern of occupation: During the relevant duration, not more than a number of 155 days fall during the durations of longer term occupation. The definition of a longer term occupation is given as the continuous period of more than 31 days during which the accommodation is in the same occupation until and unless there occur some abnormal circumstances.
  • The condition of availability: During the relevant duration, the availability of the accommodation is found for commercial reasons of letting, as the holiday accommodation to the public in general, for at least a number of 210 days.

In the case if the landlord has more than one FHL, at least one of which meets the rule of 105 days (qualifying holiday accommodation) and at least one of these don’t, (the underused accommodation), then they may make an election to average the occupation of the qualifying holiday accommodation or the underused accommodation if any. If 105 days is the average of occupation, then the treatment of the underused accommodation will be done in the form of a qualifying holiday accommodation.

It is possible to make an election in order to make a rental property continue to make a qualification as the letting of furnished holiday for up to two years after the 105 days test no longer meets.

If someone has a business of furnished holiday lettings in the UK, and other lettings in the UK, two income statements should be drawn up as if they had two distinct businesses of property. This is due to the reason that the losses and the profits can be identified for the special rules which are applicable to FHLs. The same rule is also applicable where someone has an EEA business of furnished holiday lettings and other foreign lettings.

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