New Tax Allowances For Property And Trading Income

At Budget 2016, the government announced two new allowances of £1,000 each for property and trading income, to take effect from 6 April 2017. The details were expanded in the Autumn Statement 2016, confirming that the trading allowance will also apply to certain miscellaneous income from providing assets or services. This additional measure is designed to reduce the complexity for some individuals who will no longer have to decide whether or not an activity amounts to a trade.

Broadly, where the allowances cover all of an individual’s relevant income (before expenses), they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.

There are two important exceptions worth noting here:

For those individuals who choose for simplicity to report their income and expenses of a trade according to the tax year, the trading allowance will take effect for trading income in the period 6 April 2017 to 5 April 2018. Otherwise, it will take effect for periods ending on either an accounting date or on such other date, on or after 6 April 2017, which forms the basis period for the 2017/18 tax year. 

The allowance for property income and certain miscellaneous income takes effect for such income arising from 6 April 2017 onwards.

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

There will be an equivalent rule for certain miscellaneous income, and this will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.

There will be an optional alternative method for calculating profits where the receipts from a trade or miscellaneous income are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year, less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000 where the individual has both sources of income.

As with the trading allowance, new legislation will provide for full relief where property income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses are not brought into account when calculating profits of a property business.

There will be an optional alternative method for calculating profits where the relievable receipts of a property business are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit, a deduction is allowed for the £1,000 property allowance.

The Treasury has confirmed that although the new tax relief cannot be used on the same income by someone who is taking advantage of the rent-a-room allowance, if they were letting out furnished accommodation in their home but then also renting out their driveway as a parking space, they could benefit from both allowances.