IR28 29 November 1994 TAXATION OF INCOME FROM PROPERTY AND SELF ASSESSMENT The Chancellor proposes in his Budget to make changes to the income tax rules which apply to the taxation of income from property. The Chancellor's intention is to simplify a complicated area of tax law. This will make it easier for those liable to income tax to compute their income from property and to assess it under the new self assessment regime which comes into force in the tax year 1996-97. In order to prepare for that new regime, these changes will take effect from 6 April 1995. DETAILS 1. Income from property situated in the United Kingdom is taxed under Schedule A. Income from furnished lettings is presently taxed under Case VI of Schedule D. The changes proposed apply only to income tax. The present rules for companies with Schedule A and Case VI property income will remain as they are. 2. For the purposes of income tax it is proposed to bring all income from property situated in the United Kingdom including furnished lettings within the new rules for Schedule A. Under these rules tax will be charged on the profits of a business of letting property including isolated or casual lettings. The current prescriptive approach of defining what receipts are taxable and what deductions are allowable will largely disappear and in calculating profits most of the rules currently in force for trading profits under Schedule D will apply, including the use of ordinary accounting principles. But although income from property will follow the trading computational rules, this does not mean it will be taxed as if it is trading income. Income from property will continue to be treated as investment income, and the income received as a return on capital which has been invested in the property. 3. Under the new approach all income from property situated in the United Kingdom will be pooled together regardless of the type of lease or whether the property is furnished or unfurnished, including income not derived from a lease. Expenditure incurred in earning that income will be allowed against the pooled income. Capital allowances will be given as a Schedule A expense, as part of the property income calculation. As capital allowances are not available for plant or machinery let in a dwelling house, the renewals basis or the wear and tear allowances for furnished lettings will be maintained. All losses brought forward to date will be set against the new pooled income, and any excess can be carried forward against future income from the business. 4. Interest payable in respect of a Schedule A business will be allowed as a deduction in calculating the profits of the business under the same rules as apply for other expenses incurred for the purposes of the business. The current rules under which interest relief is given as a deduction from Schedule A income will be repealed (see Press Release IR on Self Assessment ). 5. The treatment of income from property situated outside the United Kingdom (taxed under Case V of Schedule D) will be aligned with that of income from United Kingdom property by importing some of the new rules into Case V of Schedule D. This will mean that, for example, interest payable on a loan to purchase the property will in future be allowable as a deduction. 6. The new rules will apply from 6 April 1995 so that the taxation of property income is settled on the new basis prior to the commencement of self assessment in the tax year 1996- 97. Arrangements to cover the transition from the current rules and practices to the new rules will be publicised shortly. It is hoped that many of the accounting practices currently in force may be accommodated within the new rules without any difficulty. NOTES FOR EDITORS 1. Schedule A is currently charged under Section 15(1) 1 and 2, Income and Corporation Taxes Act 1988, on the receipts to which a person becomes entitled in a chargeable period, with specific deductions allowed under Section 25 for items such as payments in respect of maintenance, repairs or management. Interest is excluded as a deduction for Schedule A purposes, and is relieved under the separate rules which allow interest paid on loans for various purposes to be set off against property income. 2. Normally deductions from rent are allowed in the chargeable period in which the expenditure is incurred, but exceptionally a deduction for expenditure on a property from an earlier period can be made provided that period falls within the currency of the present lease. 3. In certain circumstances a succession of leases can be collectively treated as one for the purposes of allowing expenditure, and pooling of receipts and expenditure and the carry forward of excess expenditure is permitted between properties belonging to the same landlord where the properties are let at full rent on a landlord's repairing leases, but not for other categories of property. 4. Furnished lettings are chargeable under Case VI of Schedule D. Unlike Schedule A, there are no statutory rules setting out the expenditure allowable, and in practice the rules for taxing trades under Cases I and II of Schedule D are followed as far as possible. No capital allowances are available if plant or machinery is let for use in a dwelling house. Claims may, however, be made for a deduction for the cost of replacing a particular item of machinery or plant, but not the cost of the original purchase, or for a wear and tear allowance based on 10 per cent of the rent. 6. Income from property situated outside the United Kingdom is normally taxable under Case V of Schedule D. The rules for Case V do not at present allow a deduction for items such as interest paid on loans. 7. There will be no change to the rules computing income from property for corporation tax purposes.