Ben Chaplin explains how the newly introduced trading and property allowances will work.
During his Budget speech in March 2016, then Chancellor George Osborne announced plans to introduce two new allowances intended to “help the new world of micro-entrepreneurs who sell services online or rent out their homes through the internet”.
Mr Osborne’s proposals received Royal Assent in November 2017 and legislation was retrospectively introduced that potentially enables individuals to claim two tax free allowances up to £2,000 from 6 April 2017. The allowances are expected to remove at least half-a-million people from the scope of self-assessment. However, as the allowances were not legislated until after the 5 October 2017 self-assessment registration deadline, perhaps we will not see the administrative burden eased until later in 2018.
A £1,000 allowance is available for trading and miscellaneous income and an additional £1,000 allowance may be utilised on property income. The allowances are hybrids of income exemptions and reliefs, and there are some restrictions and conditions which dictate when they apply automatically or can be claimed.
The property allowance
The property allowance automatically applies where the taxpayer receives relevant property income in a tax year, before expenses, of £1,000 or less. Relevant property income is the total receipts derived from property from all sources, including commercial, residential and overseas property income. Full relief automatically exempt the property receipts from income tax and thus removes the taxpayer from the scope of the self-assessment system.
The allowance cannot be claimed where income from property qualifies for rent-a-room relief, even if the relief is not claimed. It is unlikely to be an issue for many taxpayers as rent-a-room relief offers substantially higher potential relief.
If receipts from property exceed £1,000, the taxpayer has the option to calculate taxable profit by deducting actual expenses, or claiming property allowance partial relief. A partial relief claim allows the individual to claim a flat deduction of £1,000 instead of actual property expenses, effectively exempting the first £1,000 of relevant property income and simplifying the profit calculation. Elections are required annually and the taxpayer will need to record actual expenditure in order to assess annually whether they are better off claiming partial relief or actual expenses.
The allowance equates to £83 per calendar month so is beneficial where the individual is letting low value property such as a garage or parking space, or where actual expenses of the property businesses are less than £1,000 per year.
Relevant property income specifically excludes income from Authorised Investment Funds and Real Estate Investment Trusts and from sources connected to the taxpayer (including employers, partnerships, close companies they participate and some enterprises they are connected to via personal relationships). Partnership income is also specifically excluded. Partnership is interpreted to mean a registered, formal partnership rather than property held as joint tenants, which HMRC do not normally consider to be a partnership. The allowance is not divided between owners and each joint property owner can independently elect to claim the allowance or deduct expenses if partial relief applies.
Trade allowance is similar in application to the property allowance but with some of its own nuances to consider. The allowance applies to trade income and miscellaneous income caught by the ‘mop up’ provision which brings in income not otherwise charged.
As with the property allowance, we must consider the combined receipts of all the individual’s relevant trading and miscellaneous income. If the receipts from relevant activities are less than £1,000 the trading allowance automatically exempts the income and the individual is not required to self-assess or claim the exemption.
Partial relief is also available with the trade allowance where receipts exceed £1,000. Partial relief is obtained by electing to claim a £1,000 deduction against turnover rather than claiming actual business expenses. If the taxpayer has more than one trade the allowance can be offset against the income as the individual prefers, but cannot create a loss on any of the activities.
This may not appear to be significant when considering tax years in isolation but might be relevant when considering the traversing of tax years when making loss relief claims.
A further automatic reprieve is made where the receipts of the activities are less than £1,000 on a cash accounting basis but would exceed that amount when accounting under the accruals concept. The legislation assumes receipts are calculated applying the cash basis without requiring the individual to make a formal cash basis election.
Exceptions similar to those within the property allowance provisions also apply. Receipts from connected parties as described above and partnership income is not eligible for the allowance. Trade receipts that are eligible for rent-a-room relief are also excepted, for example board and lodgings where additional services are provided.
Disapplying the allowances
For many individuals the allowances will provide simplicity and allow them to make modest income with no tax implications.
However, some individuals may be inclined to disapply the allowances to reap benefits afforded elsewhere in the legislation. Take for example an individual who has trade income of less than £1,000 and that income is covered by personal allowances. Disapplying the exemption of the income could increase their Net Relevant Earnings and result in them receiving an additional 20% pension contribution without incurring any additional tax liability.
It is clear these simplifications to the tax system will need careful consideration in some circumstances. As with all significant alterations to everyday legislation, time and experience will result in an automated consideration of when to claim and disapply the reliefs and allowances.
- Ben Chaplin is Managing Director of CronerTaxwise
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