Tax Credits: Property income

The capital value of any property held by claimant, or their partner, is ignored but the rental income/profit is taken into account, unless exempt from income tax or excluded from profits under the rent-a-room scheme (section 791 ff of ITTOIA 2005). For the most part, property income for tax credits is calculated in the same way as for income tax under ITTOIA 2005, Part 3.

Changes to the tax system for landlords of residential properties mean that from 6 April 2017 tax relief for finance costs such as mortgage interest will be restricted to the basic rate of Income Tax. This was phased in gradually over four years.

Now the rules are fully in place,  instead of deducting finance costs as an allowable expense when working out property income profit/loss, there is a tax reduction which, for most low income people will mean they will receive basic rate tax relief on the finance costs as the reduction. However, tax credit claimants are protected from the unintended consequences that flow from the new rules so that, in calculating property income, the restrictions in section 272A of ITTOIA (restricting deductions for finance costs related to residential property) and section 399A of ITA (property partnerships: restriction of relief for investment loan interest) are disregarded. This is explained in HMRC’s tax credit technical manual (TCTM 04006).

The rental income/profit from an overseas property business is taken into account as foreign income.

Property income does not include amounts which are exempt from income tax or excluded from profits under the rent-a-room scheme (section 791 ff of ITTOIA 2005).

Where a property business makes a loss which the claimant’s general income is insufficient to absorb, the surplus is relieved in the same way as for income tax under ITA 2007, sections 118 and 119, by carry-forward against profits of the same property business in future years, taking earlier years first.

In addition, if part of the loss arises from capital allowances or from agricultural land, and relief can be obtained under ITA 2007, section 120, that part of the loss can be offset against other income of the claimant either in the tax year the loss was made or the following tax year. On one interpretation of the legislation, the loss cannot be set off against the income of the partner of the person making the loss, but this sits rather oddly in the context of a joint claim for tax credits in which the joint income of the couple is supposed to be aggregated.

Prior to April 2011, losses from furnished holiday lettings were treated the same as trading income and could be offset against total income. However, following changes in the tax system, from April 2011 such losses are treated in the same way as other property income so they can only be offset by carrying forward against profits from the same furniture holiday lettings business in future years.

£1,000 Property Allowance

From 6 April 2017, the Government introduced a £1,000 property allowance alongside a similar allowance for trading income. This means, for those who qualify and choose to take advantage of this tax allowance, they won't pay tax on the first £1,000 of their taxable income from renting property. For tax credit purposes, anyone claiming this allowance should still declare in their tax credit claim the amount of their property income after the £1,000 tax allowance is deducted. You can read more about how the £1,000 trading and property allowances work on the GOV.UK website and on the LITRG website.

Last reviewed/updated 14 April 2022