Introduction: what is a UK property business?
Rental business - what is it?
Profits from UK land or property are treated, for tax purposes, as arising from a business. The broad scheme is that rental business profits are computed using the same principles as for trades but the taxpayer is not actually treated as if they are trading. Thus, for example, CGT reliefs for traders are not available. The computation is based on commercial accounts drawn up in accordance with correct accounting principles. In particular, accounts should be on the ‘earnings basis’ but certain small cases can use the ‘cash basis’. (‘Earnings basis’ and the ‘cash basis’ are dealt with at PIM1100.)
For simplicity the rental activity is called a ‘rental business’ in this manual. But the rental business can include other types of income as well as rents.
- More information about rents and other receipts is given at PIM1050 onwards.
- More information about the expenditure that can be deducted from receipts to arrive at taxable rental business profit is given at PIM2000 onwards.
Terms used in legislation
In ITTOIA05/S264 the rental business of an IT payer is called a UK property business.
In ICTA88/S15 the rental business of a CT payer (and an IT payer for tax years up to 2004-05) is called a Schedule A business.
Who carries on a rental business?
Any person or body of persons carries on a rental business if:
- they own or have an interest in land or property in the UK; and
- they enter into transactions that produce rents or other receipts liable to IT or CT from that land or property.
The list of those who carry on a rental business includes individuals, partners, trustees, personal representatives, trustees in bankruptcy, and non-resident companies subject to IT on their income from property. For more about trusts see PIM1045.
A person will carry on a rental business even if they engage an agent to handle it for them. The person carries on the business through the agent.
All rental business activities treated as one
In most cases all the various types of income from land and property in the UK are treated as parts of the same, single rental business. It does not matter how many properties the taxpayer has, or how many different types of income from land and property. This means that normally all the rental business receipts and expenditure can be lumped together and, hence, that the expenses on one property can be deducted from the receipts of another.
There are some special rules for:
- jointly owned property and partnerships - PIM1030,
- trusts and trustees - PIM1045,
- properties which are not let on commercial terms - PIM2220,
- agricultural land - PIM4220,
- receipts from letting a room or rooms in the taxpayer’s own home under the rent-a-room scheme - PIM4000 onwards,
- furnished holiday lettings - PIM4100 onwards; and
- rents from properties outside the UK - PIM4700 onwards,
- activities carried on in different capacities - see the paragraph below.
Activities carried on in different capacities
In law an individual can act in different legal capacities. Rental business activities are treated as parts of a single business where the activities are carried on by the same person acting in the same legal capacity. Where different legal capacities are involved different rental businesses will result.
It may be that an individual has property income in a number of different capacities. He could, for example:
- hold property in his own right,
- be a member of a partnership, and have a part share in property which the partnership lets,
- be a trustee of a trust receiving rental income.
These would all have to be treated as belonging to different rental businesses.
Trustees, executors and partners are common examples of cases where a person acts in a different legal capacity. Executors, for instance, act on behalf of the estate of the deceased and not for themselves. Any rental business conducted in a different capacity must be kept separate from any personal rental business. A loss on one can’t be set against a profit on another. For more about life interest trusts see PIM1045.
Non-resident companies are treated as having two separate rental businesses if they have property income within the charge to IT and CT, ICTA88/S15 (1A).
Income which is not included in the UK property business - IT payers
Some income that is assessed under Case VI, Schedule D for companies has been included as property income in ITTOIA05 Part 3 - see PIM1113. Such income is specifically charged to income tax under the relevant provision but is not included in the profits of the rental business.
Who is charged to tax
Normally it is the person who carries on the rental business who is charged to tax. But the law says the IT charge falls on the ‘person receiving or entitled to the profits’, ITTOIA05/S271. In most cases the person entitled to the rental income will also receive it. But different people could be involved where, for example, the landlord engages an agent to handle the rental business. The landlord will then carry on the rental business through the agent. It will still usually be the landlord who is chargeable to tax. But where the landlord normally lives abroad we may collect tax from the agent.
Where the taxpayer normally lives abroad and engages the services of an agent in the UK, see PIM4800.
The concept of the Schedule A business - CT payers (and IT payers up to 2004-05)
All income from property in the UK arising to the same person in the same capacity is to be treated as part of a single Schedule A business.
Schedule A is contained in ICTA88/S15 as amended by FA95/S39 (1), FA98/S38 and FA98/SCH5. The charge is defined in paragraph (1) 1 (1) as follows:
‘Tax is charged under this schedule on the annual profits arising from a business carried on for the exploitation, as a source of rents or other receipts, of any estate, interest or rights in or over any land in the United Kingdom’.
‘Land’ includes buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land - Schedule 1 Interpretation Act 1978.
ICTA88/S15 (1) 1 (2) provides that any transaction entered into for such exploitation is to be taken as being entered into in the course of a Schedule A business. This therefore includes activities which do not otherwise seem so organised as to be a business. It also includes isolated one-off transactions.
ICTA88/S15 (1) 1 (3) as amended by FA98/SCH5 provides that all the businesses and transactions giving rise to a Schedule A charge carried on by any particular person or partnership are to be treated as being part of a single business. This will be so whatever the actual commercial organisation of the activities - for example a taxpayer who has some unfurnished letting and a separately organised furnished holiday letting activity still only has a single Schedule A business.
A company could invest in property through a partnership and also have letting income in its own right. This would amount to two separate Schedule A businesses.
Overseas property business (PIM4700 onwards)
The definition of an ‘overseas property business’ is identical to the definition of a ‘UK property business’ except that the land from which the income arises is outside the UK. An overseas property business is a separate business from a UK property business.