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HMRC internal manual

Property Income Manual

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.

From the 2017-18 tax year, the cash basis (see PIM5000 onwards) will be 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 another CT customer. Before this change however, the vast majority of landlords had to use GAAP (see PIM6050).

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.

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 PIM1900 onwards.

Terms used in legislation

In ITTOIA05/S264 and CTA09/S205, a rental business is referred to as a UK property business.

Alternatively, if applicable, ITTOIA05/265 and CTA09/206 refer to an overseas property 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.

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.

There are also 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

  • 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.

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.