PROPERTY &

INVESTMENT INCOME
June 2025 – March 2026
BY SABI AKTHER 1
 What to focus on?
• Property Business Profits
• General Principles
• Property Income – Cash Basis
• Allowable Expenses – Cash Basis
• Finance Cost Restriction
• Capital Expenditure – Cash Basis
• Property Income – Accruals Basis
• Lease Premiums
• Rent-a-Room Letting
• Furnished Holiday Lettings
• Losses & Loss Relief 2
 What to focus on?

• Investment Income
• Exempt Income
• Individual Savings Accounts (ISA)
• Accrued Income Scheme
• Conclusion
• Summary
• Technical Articles

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Objective: To explain in detail the tax treatment of property income derived from the letting of
property in the UK and the different types of investment income that are exempt from income tax,
including the tax exempt personal investment plan called an Individual Savings Account (ISA).

Property & Investment

Income

Property Business Profits Investment Income

• General Principles • Exempt Income

• Composition • Individual Savings
• Lease Premiums Accounts (ISA)
• Allowable Expenses • Accrued Income
• Finance Cost Restriction Scheme
• Rent-a-Room Letting
• Furnished Holiday Lettings
• Losses & Loss Relief 4
 Property Business Profits
1.1 General Principles

Individuals are subject to income tax on the profit arising from the letting of furnished
and unfurnished property (commercial or residential) situated in the UK.

The amount assessable for a tax year is usually the net profit arising from the letting of
all properties owned by the landlord in the tax year ending on 5 April, i.e. for the tax year
2024-25, income less expenses arising in the period 6 April 2024 to 5 April 2025.

Property income can be assessed using the cash basis, or the accruals basis. However,
the cash basis is the default basis for an individual with property income.

The cash basis means that income and expenses are accounted for when the cash is
received or paid. Whereas under the accruals basis, assessable income is the rent
receivable in respect of the tax year, and deductible expenses are expenses payable in 5
respect of the tax year.
 Property Business Profits
1.1 General Principles

A landlord can elect to use the accruals basis, and the accruals basis must be used if
property income cash basis receipts for the year exceed £150,000. However, it is
generally more straightforward to use the cash basis.

The examining team has stated that in exam questions involving property income for
individuals or partnerships, it should be assumed that the cash basis is used, unless
a question specifically states otherwise.

If let property comprises a mixture of furnished holiday lettings and other lettings, two
computations must be prepared as the former is treated as earned income and the latter
as unearned income, and losses cannot be offset between the two. (Earned income is
relevant because the amount a taxpayer can pay into their pension depends on their
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earnings.)
 Property Business Profits
1.2 Property Income – Cash Basis

The default basis for calculating property income for individuals and partnerships is the
cash basis. (The rules for companies are covered in Lecture17.)

Assessable property income is calculated as:

£
Rental income received x
Less: related expenses paid x
Assessable income x

The rental income and related expenses are assessable and deductible on a cash
received basis. As such, it is irrelevant which period the income and expenses actually
7
relate to, as they are included in assessable income when they are received/paid.
 Property Business Profits
1.3 Allowable Expenses – Cash Basis

Allowable expenses are those of a revenue nature incurred by the landlord wholly and
exclusively in relation to the letting of the property before, during or between leases:

• Insurance;
• Management (e.g. accountancy and legal costs);
• Rent payable;
• Water charges;
• Council tax (residential property only) and business rates (commercial property);
• Repairs (but not if the purchase price was discounted to allow for repairs, or the
property could not be let without the repair);
• Loan interest (subject to restriction, see s.1.4);
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• Motor expenses relating to property business, such as property visits (see s.1.5).
 Property Business Profits

1.3 Allowable Expenses – Cash Basis

If the landlord occupies the property, even for part of the year, any expenses relating to
private use are not allowable expenses.

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 Property Business Profits
1.3 Allowable Expenses – Cash Basis

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 Property Business Profits
1.3 Allowable Expenses – Cash Basis

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 Property Business Profits
1.4 Finance Cost Restriction

For residential lettings (apart from furnished holiday lettings), an individual’s finance costs
relating to their property business are a disallowable expense. To restrict the amount of
tax relief available to landlords for the costs of financing residential property, for the tax
year 2024-25 100% of the finance costs are "blocked".

In place of the disallowed expense, the landlord will be allowed a finance costs tax
reducer (tax credit) of 20% of the blocked finance cost, which may be set off against the
income tax payable on the rental income. This essentially restricts the tax relief available
to landlords for the costs of financing residential property to basic rate tax relief, so it
does not affect basic rate taxpayers.

These restrictions apply to any loans taken out to acquire a residential letting property, or
to improve or repair such a property, and include any interest payable on the loans and
any fees or commissions incurred in obtaining the loans.

The restrictions do not apply to commercial properties or furnished holiday lettings, 12

therefore any interest related to these continues to be fully deductible from rental income.
13
 Property Business Profits

1.4 Finance Cost Restriction

This treatment in most cases means that finance costs are effectively given tax relief,
but only at the basic rate.

However, the individual's taxable income will be increased by the disallowance, which
may also result in one or more of the following:

• a higher tax band rate applying;

• a loss of personal allowance and/or personal savings allowance;

• application of the high income child benefit charge.

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 Property Business Profits

1.4 Finance Cost Restriction

In order to reduce these additional tax costs, the landlord could consider planning
strategies such as:

• letting the property as a furnished holiday let (FHL);

• changing the property portfolio from residential to commercial lettings; or

• incorporating the property business.

 The £1,000 tax free allowance on property income is not examinable.

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 Property Business Profits
1.5 Capital Expenditure – Cash Basis

Under the cash basis, there is generally not the usual distinction between capital and
revenue expenditure which applies to trading income.

Capital expenditure on land and buildings is generally not allowable, particularly if there
is any element of improvement in the expenditure, however expenditure on repairs of
the property are allowable. Repairs restore an asset to its original condition, sometimes
by replacing parts of it. Some improvements will be incidental to the repair, such as
replacing single glazed windows with double glazed windows, as this is the nearest
modern equivalent, so this would be allowable. It is important to consider if the
expenditure is a straightforward repair, or if the expenditure will result in any overall
improvement to the property, as improvement expenditure is not allowable. Expenditure
which is required to make the property suitable for letting is treated as capital
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expenditure, and therefore not allowable.
 Property Business Profits
1.5 Capital Expenditure – Cash Basis

Expenditure on plant and machinery used in running the business, such as cleaning
equipment, tools for repairs and maintenance, and office equipment will be deductible
expenditure when paid.

There are special rules for cars and replacement of domestic items such as furniture.

For cars, the landlord has a choice of:

• Capital allowances which are available on the cost of cars used in the business (see
Lecture 7). General motor running expenses such as fuel and insurance are
allowable expenses when paid.

• Alternatively, HMRC approved mileage rates can be used to claim a deduction for
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motor expenses, instead of capital allowances and actual costs incurred.
 Property Business Profits

1.5 Capital Expenditure – Cash Basis

HMRC’s statutory approved mileage allowances are:

First 10,000 business miles in the tax year 45p

Each business mile over 10,000 25p

The choice for car expenses is available under both the cash and accruals basis.

The statutory mileage allowances are included in the tax rates and allowances
provided in the exam.

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 Property Business Profits
1.5 Capital Expenditure – Cash Basis

For both the cash and accruals basis, a ’replacement of domestic items relief’ can be
claimed for items such as furniture, as an allowable deduction. The relief is for the
replacement of these items, but not the initial purchase of them or any element of
improvement. Domestic items for which this relief is available include:

• Moveable furniture, such as beds and wardrobes;

• Furnishings, such as curtains, linen and carpets;

• Household appliances, such as televisions, fridges and freezers;

• Kitchenware, such as dinnerware and cutlery. 19

 Property Business Profits

1.5 Capital Expenditure – Cash Basis

The new item must be solely for use by the tenants, and the old item must no longer be
available. Any sales proceeds from the old assets being replaced are deducted from the
available relief.

The deduction is restricted to the cost of purchasing an equivalent item of the original
item. So any element of improvement, such as upgrading a sofa to a sofa bed, would be
limited to the replacement cost of the equivalent sofa. Although if the sofa bed is later
replaced by another sofa bed, then the full cost of the replacement sofa bed would then
be deductible
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Property Business Profits

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Property Business Profits

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 Property Business Profits

1.6 Property Income – accruals basis

An individual can elect to use the accruals basis if they wish, and it must be used if
property income receipts for the year exceed £150,000.

For individuals or partnerships, you should only use the accruals basis in an exam
question if it states that the accruals basis should be used, or that the cash basis is
not used.

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 Property Business Profits
1.6 Property Income – accruals basis

Under the accruals basis, rental income should be accrued for the tax year that it
relates to. For example, if a tenant is late in paying the rent for March 2025, and
doesn’t pay this until June 2025, it should still be included in the rental income for the
tax year 2024-25, being the tax year it relates to.

Similarly, expenditure should be accrued or prepaid so that the amount of expenses

included relates to the tax year. For example, if insurance is paid in June 2024, as in
Example 2, for the period 1 July 2024 to 30 June 2025, then only the amount for the
period July 2023 to March 2024 should be included (£360 × 9/12 = £270) plus the
relevant amount from the prior year payment, being the three months from April 2024
to June 2025 (£320 × 3/12 = £80), so insurance costs allowed for the tax year 2024-25
would be £350. 24
 Property Business Profits
1.6 Property Income – accruals basis

If a tenant was to leave without paying outstanding rent, and the rent has already been
accrued and therefore included in taxable income, then this irrecoverable debt can be
claimed as an impairment loss (bad debt).

Under the accruals basis, the treatment of plant and machinery used in the business is
different from the treatment under the cash basis. Capital expenditure on plant and
machinery (such as cleaning equipment) is not an allowable deduction, however capital
allowances may be available (see Lecture 7).

The treatment of replacement of domestic items, motor expenses, and the finance cost
restriction, apply under the accruals method, in the same way they do under the cash
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basis.
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 Property Business Profits
1.7 Lease Premiums

Property income comprises:

£
Rent income x
Income element of a short lease premium received x
x
Less: allowable expenses (x)
Assessable property income x

A lease premium is a one-off lump sum, payable at the start of a lease, in consideration
for granting an interest in a property. As such it is normally capital, however part of the
premium may represent an advance payment of rent, particularly where the lease is a
short lease 28
 Property Business Profits

1.7 Lease Premiums

Lease premiums paid upfront for the grant of a short lease (i.e. one of 50 or fewer years'
duration), are liable to tax on a special basis. A premium received for the grant of a short
lease is treated as partly income (therefore chargeable to income tax) and partly capital
(chargeable to capital gains tax) as shown below:
£
Gross premium x
Less: Capital element = 2% × Gross premium × (n − 1) (x)
Income element x
n = the number of complete years of the lease.
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 Property Business Profits

1.7 Lease Premiums

As the pro-forma calculation shown demonstrates, the amount treated as capital

increases by 2% each year as the duration of the lease lengthens. A premium on a lease
of 51 or more years is a 100% capital sum and none of the premium is treated as
income.

The capital element of the premium is assessable to CGT, but this matter is not
examinable.

Lease premiums will not be examined in the context of a question where the trader is
using the cash basis.
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 Property Business Profits

1.7 Lease Premiums

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 Property Business Profits
1.7 Lease Premiums

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 Property Business Profits
1.7 Lease Premiums

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 Property Business Profits
1.8 Rent-a-Room Letting

"Rent-a-room" letting is the letting of one (or more) rooms in the taxpayer's main residence
(i.e. their home).

If gross income for the tax year is £7,500 or less:

• The income is exempt from income tax;

• This limit must be split if the letting income is treated as being received by more than one
individual. Therefore, a married couple, or civil partners, could choose whether to have
one individual receiving the letting income and the full use of the exemption of £7,500, or
they could split the letting income and have an exemption of £3,750 each.

• A taxpayer may elect for the rent-a-room exemption not to apply where income is less
34
than £7,500, which would be beneficial if a loss had been incurred.
 Property Business Profits
1.8 Rent-a-Room Letting

If gross income exceeds £7,500 for the tax year, the taxable amount is either:

• the net profit (gross income less expenses less replacement of domestic items); or

• the excess of gross income over £7,500 (provided a rent-a-room election is made).

A taxpayer can assess which method provides the lower taxable amount, which will
depend on whether expenses and any replacement of domestic items exceeds £7,500
or not.

The rent-a-room election must be made by 31 January within two years of the end of the
tax year (e.g. 31 January 2027 for tax year 2024-25). It remains in force until either
revoked or gross income falls below £7,500. (The same time limit applies for a claim to
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ignore the rent-a-room exemption.)
 Property Business Profits

1.8 Rent-a-Room Letting

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 Property Business Profits
1.8 Rent-a-Room Letting

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 Property Business Profits

1.9 Furnished Holiday Lettings

1.9.1 Conditions

For exam purposes, accommodation will always be located in the UK. The conditions
to be met are not given in the tax rates and allowances provided in the exam and
should therefore be memorised.

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 Property Business Profits
1.9 Furnished Holiday Lettings

1.9.1 Conditions

Furnished holiday accommodation (FHA) is a property located in the UK that is let on a

commercial basis and which satisfies all the following conditions:

• The property is let furnished;

• The property is let on a commercial basis with a view to realisation of profit;

• It is available to let for at least 210 days a year;

• It is actually let for at least 105 days a year; and

• The total of longer-term lettings do not exceed 155 days a year (see below). 39
 Property Business Profits
1.9 Furnished Holiday Lettings

1.9.1 Conditions

A longer-term letting is a single letting to the same person of more than 31 consecutive
days and does not count as a holiday letting. It is possible to let to the same person for
more than 31 consecutive days, however, the total of such periods must not exceed
155 days in the tax year.

If a taxpayer has a number of properties let as FHA, each property must individually
meet the availability condition and the longer-term letting condition.

If the property is used privately for part of the year, the expenses need to be
apportioned on a reasonable basis 40
 Property Business Profits
1.9 Furnished Holiday Lettings

1.9.1 Conditions

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 Property Business Profits
1.9 Furnished Holiday Lettings

1.9.1 Conditions

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 Property Business Profits

1.9 Furnished Holiday Lettings

1.9.2 Tax Consequences

The profits arising from the letting of FHA are treated as earned rather than unearned
income. Consequently, the profit or loss from FHA must be calculated separately from
other UK property letting profits or losses.

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 Property Business Profits
1.9 Furnished Holiday Lettings

1.9.2 Tax Consequences

FHA attracts the following specific tax advantages:

 The profit counts as relevant earnings for pension contribution relief purposes.
 Plant and machinery, fixtures and equipment (i.e. furnishings, kitchen equipment, and
sanitary ware):

- Cash basis – a deduction is available for the cost of these based on the amount paid
(instead of replacement of domestic items relief);

- Accruals basis – capital allowances (see Lecture 7) are available (instead of

replacement of domestic items relief).

 The basic rate restriction for finance costs does not apply to FHA.
 FHA is a business asset for capital gains tax purposes attracting rollover relief, holdover 44
for gifts, and the business asset disposal relief rate of tax (see Lecture15).
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 Property Business Profits
1.10 Losses and Loss Relief

Losses arise when expenses exceed income (including the income element of a short
lease premium). If a taxpayer has more than one property, the profits and losses are
aggregated (although not between FHA and other lettings), which provides immediate
loss relief. If there is a loss overall, property income will be reported as nil for the tax
year.

Losses that are unrelieved can be carried forward and relieved against the first
available future property income as follows:

• loss from the letting of FHA – against future profits from FHA lettings only;

• loss on all other let properties – against future profits from all lettings except FHAs. 47
 Investment Income

2.1 Exempt Income

The following types of investment income are exempt from income tax:

• interest from National Savings Certificates, and winnings from Premium Bonds
(investments made with NS&I);

• interest and dividends received from the investments contained in an Individual

Savings Account (ISA).

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 Investment Income
2.2 Individual Savings Accounts (ISA)

An ISA may be opened by any individual who is aged 18 years or older (16 years or
older for a cash only ISA), and who is resident in the UK. ISAs have a maximum limit
that can be invested in each tax year. The maximum amount that can be invested in the
tax year 2024-25 is £20,000 per person.

A taxpayer can invest with two different account managers – the cash element with one
and the stocks and shares element with another.

Alternatively, the investment may be made with one account manager which may
comprise either or both cash and stocks and shares, up to the maximum value of
£20,000.
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Banks, building societies and insurance companies are the principal account managers.
 Investment Income
2.2 Individual Savings Accounts (ISA)

Individuals are not obliged to invest every year.

Apart from the annual income (interest and dividends) being exempt from income tax,
chargeable gains (and losses) arising on the disposal of shares and units of unit trusts
are also exempt from capital gains tax.

ISA investments can be held indefinitely. There is no minimum holding period, so

withdrawals can be made at any time. Cash funds in an ISA can now be withdrawn and
replaced (within the same tax year) without counting towards the ISA investment limit.

The introduction of the nil rate bands for savings and dividend income has reduced the
tax benefit of ISAs for many taxpayers. However, they are still effective where the nil
rate income bands are exceeded or chargeable gains exceed the annual exempt 50
amount.
 Investment Income
2.3 Accrued Income Scheme

The accrued income scheme operates to counteract the practice of "bond washing",
where otherwise income arising on certain loans could be converted to capital gains by
selling the securities at a price including accrued interest.

The need to prevent this was especially important in respect of UK government

securities ("gilts"), which are securities issued by the UK Government as a way of
borrowing money. UK government security gilts are exempt from capital gains tax.
Interest is normally paid on the gilts at regular set intervals. As the date for the interest
payment gets nearer, the value of the gilts starts to increase, since the purchaser will
be entitled to the next interest payment, as well as the underlying capital amount. 51
 Investment Income
2.3 Accrued Income Scheme

Under the accrued income scheme, the part of the selling price which represents
accrued interest is treated as income of the seller, rather than as capital proceeds.
Correspondingly, the accrued interest element is deducted from the taxable income of
the purchaser who is subsequently entitled to actually receive the interest.

The adjustment is made in the tax year of the first interest payment date following the
sale or purchase.

Although the scheme applies to a variety of securities including certain types of

corporate bonds and other loan notes, it will only be examined in respect of interest
on gilts. 52
 Investment Income

2.3 Accrued Income Scheme

The accrued income scheme does not apply if a taxpayer's total holding of securities is
less than £5,000 nominal value throughout the year of assessment and the
immediately preceding year. If the £5,000 threshold is exceeded, the scheme applies
to all transfers, no matter how small.

If interest-bearing gilts are held in an ISA, they are tax-exempt and not subject to the
accrued income scheme.

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 Investment Income
2.3 Accrued Income Scheme

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 Conclusion
Syllabus Coverage
B. Income Tax and NIC Liabilities
4. Property and investment income
a) Compute property business profits.
b) Explain the treatment of furnished holiday lettings.
c) Understand rent-a-room relief.
d) Compute the amount assessable when a premium is received for the grant of a short
lease.
e) Understand and apply the restriction on property income finance costs.
f) Understand how relief for a property business loss is given.
g) Recognise the treatment of individual savings accounts (ISAs) and other tax exempt
investments.
h) Understand how the accrued income scheme applies to UK Government securities 55
(gilts).
 Conclusion
Summary

• Individuals are taxed on property income arising from furnished, unfurnished, commercial
and residential property lettings in the UK, as well as premiums on leases.

• Property income can be calculated using the cash basis or the accruals basis, and the
accrual basis must be used if income exceeds £150,000.

• For exam purposes, the cash basis should be the default basis, unless a question states
otherwise.

• Allowable expenses (wholly and exclusively for the business of letting) generally include
property maintenance, insurance, council tax and business rates, loan interest and
replacement furniture relief. Relief is also available for motor expenses. 56
 Conclusion
Summary

• Capital allowances for plant and machinery and impairment losses are allowable
expenses under the accruals basis. Under the cash basis, relief is given for plant and
machinery by deducting the cost when acquired.

• Finance costs relating to an individual's residential property income may be restricted

to basic rate relief.

• The income element of a short lease premium (lump-sum advance payment) is the
difference between the gross premium and capital element.

• Capital element = Gross premium × 2% (n − 1), where n is the number of years

(≤50). 57
 Conclusion
Summary
• Property income is calculated as: £
Rental income x
Income element of a short lease premium received x
Less: allowable expenses (x)
Property income x

• Rent-a-room letting:

- Receipts ≤£7,500: exempt from income tax;

- Receipts >£7,500: taxed on net profit or gross excess (under rent-a-room

election).

• A rent-a-room election remains in force until revoked or until income falls below
58
£7,500. Spouses/civil partners may share rent-a-room relief 50:50.
 Conclusion
Summary

• FHA must be available for at least 210 days a year, actually let for at least 105 days
and longer-term lettings (essentially >31 days) must not exceed 155 days. Profits and
losses are treated as earned and are calculated separately from other property
lettings.

• FHA tax advantages include inclusion in relevant earnings for pension contribution
relief, plant and machinery capital allowances on all fixtures and equipment, and
treatment as a business asset for CGT purposes.

• National Savings Certificates and Individual Savings Accounts (ISAs) provide tax-
exempt income (interest and/or dividends) and tax-exempt capital gains on disposal.

• The accrued income scheme brings into income tax the accrued interest element of 59
sales and purchases of gilts.
 Conclusion

Technical Articles

In addition to the Finance Act 2024 Article, there are several technical articles for Taxation
(UK). However, there are no technical articles that relate specifically to this chapter.

For more recent articles and other resources please visit the ACCA global website.

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