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HMRC internal manual

Property Income Manual

Use of trading income rules: similarities and differences to trading income rules

The trading income rules which apply to a rental business are that profits should be determined on the same normal commercial principles, such as:

  • include revenue items and exclude capital items (see BIM35000 onwards),

  • determine profits on an accruals basis (unless the cash basis is being used),

  • use the same statutory rules in determining what expenses to allow in computing the profits (see BIM42100 onwards). For example, apply the rule that no expense is allowable unless it is wholly and exclusively for the purposes of the business.

Differences from trading income rules

In certain ways the computation of property income is different.

  • Trade basis periods are not used (but see PIM1040 for partnerships).

  • Trade loss rules do not apply to property income, except for furnished holiday lettings (see PIM4100 onwards).

  • Some statutory rules apply only to rental income, for example the taxation of premiums received (see PIM1200 onwards).

  • Some trading income rules don’t apply (see PIM1103).

Applying the trading income rules: IT for 2005-06 onwards and CT for 2009-10 onwards

The trading income rules in Part 2 of ITTOIA05 that apply for the purposes of computing the profits of a rental business are set out in ITTOIA05/S272 (2) (see PIM1104).

The trading income rules in Part 4 CTA09 that apply for the purposes of computing the profits of a rental business are set out in CTA09/S210 (see PIM1106).

In particular the familiar ‘wholly and exclusively’ rule applies to property income.

Applying Case I statutory rules: IT to 2004-05 and CT to 2008-09

Many of the Case I statutory rules apply to Schedule A. ICTA88/S21A (1) as amended by FA98/SCH5 requires the profits or gains, or losses, of a Schedule A business to be computed as if the provisions in Part IV Chapter V of ICTA88 apply to it as they do in computing the profits or gains of a trade under Schedule D Case I, unless there is express provision to the contrary. Express exclusions are dealt with in PIM7040.

Part IV Chapter V includes many Case I computational provisions. In particular, it includes ICTA88/S74 so that the familiar ‘wholly and exclusively’ rule applies to Schedule A.

Certain other statutory provisions also apply to Schedule A as they do for Case I (see PIM7030).

Case I profits are computed by determining profit on ordinary commercial lines and then adjusting if necessary to take account of specific provisions of the Taxes Acts. See the Tax Case references in BIM42100 onwards. Apply the same principle to Schedule A.