Introduction: what is a UK property business?
You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.
UK property business - legislation
“UK property business” includes all activity for generating income from land in the UK and any transactions a taxpayer enters into connected with land. See section 264 of the Income Tax (Trading and Other Income) Act 2005 (for taxpayers in charge to income tax (IT)) and section 205 of the Corporation Tax Act 2009 (for taxpayers in charge to corporation tax (CT)).
A UK taxpayer may also have an overseas property business – see PIM1025.
For simplicity a property business is called a ‘rental business’ in this manual, though it can include other types of income as well as rents.
Rental business: what is it?
Profits from UK land or property are treated, for tax purposes, as arising from a business.
Since the 2017-18 tax year the cash basis (see PIM1090 onwards) is the default way of reporting the profits or losses of a property business for IT customers. However, profits or losses of a tax year must be calculated in accordance with GAAP if certain criteria are met - most notably if the landlord is a company or other CT customer (see PIM1100 onwards). Before this change however, the vast majority of landlords had to use GAAP.
The broad scheme is that rental business profits are computed using the same principles as for calculating the profits of a trade but the taxpayer is not actually treated as if they are trading – unless they meet the normal trading tests (see BIM60000). Thus, for example, CGT reliefs for traders are not normally available.
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 PIM1900 onwards.
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 is clear from section 264(a) (UK property businesses) and section 265(a) (overseas property businesses).
This means that normally all the rental business receipts and expenditure can be amalgamated and, hence, that the expenses on one property can be deducted from the receipts of another.
However, if a landlord has income from property in the UK and income from property outside the UK, the landlord is treated as having two business: a UK property business and an overseas property business – legislation does not amalgamate them.
If a landlord has Furnished Holiday Lettings (FHLs), the profits are part of the taxpayer’s UK or overseas property business – FHLs are not a third category of property business.
There are also special rules for:
- jointly owned property and partnerships - PIM1030,
- trusts and trustees - PIM1045,
- properties which are not let on commercial terms - PIM2130,
- agricultural land - PIM4224,
- 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
- 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. They could, for example:
- hold property in their 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.
Who is charged to income 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.