Trading allowance and property allowance explained

8th August 2018 News Nicola Roby

From 6 April 2017, two £1,000 tax-free allowances came into play. These are the trading allowance and the property allowance.

Essentially, the trading and property allowances provide for a complete exemption from income tax if the total trading or property income for the tax year is less than £1,000.

Nicola Roby from CHW Accountants in Bolton explains ‘Each allowance is aimed at relieving the taxpayer from having to report nominal amounts of income. This in turn reduces the burden for HMRC as they would find it cost-ineffective to process the returns and collect the tax due.’

If a person has both trading and property income, they will receive a £1,000 allowance for each.

How does it work?

Trading allowance

This provides for full relief where the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year, are up to £1,000. The effect of the relief is that the profits from the trade will be nil.

The allowance is applicable to income from either self-employment, or casual services such as babysitting, private tuition, gardening etc., and for the purposes of the allowance, the income and profits of all an individual’s trades are combined.

Property allowance

The property allowance aims to provide simplicity and certainty regarding income tax obligations on small amounts of income from renting out property.

The property allowance applies to relevant property income which includes:

• Both UK and overseas property businesses;
• Both commercial and residential letting (but not rent-a-room businesses).

If an individual has more than one property business, for example a UK and an overseas business, then the receipts of both trades are combined with only a single £1,000 allowance available.

If you own a property jointly with others, each individual is eligible for the £1,000 allowance against their share of the gross rental income.

Partial Relief

If the total income exceeds £1,000, the legislation allows for so-called partial relief and, individuals can choose to either:

1. deduct their actual business expenses from trading income in the usual way, or
2. elect instead for the £1,000 property allowance as a deduction from income

It should be noted that if you claim partial relief you cannot deduct any other expenses, just the £1,000 allowance.

Although the concept of a tax free allowance sounds attractive, there are a number of exclusions which limit its application in practice and you should seek advice if you are unsure.

The rules surrounding these allowances are not always straightforward in their application. For further advice contact CHW Small Business Accountants in Bolton on 01204 534031 or via our contact us page.

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