This guide outlines the UK tax treatment of property income, referencing HMRC's Property Income Manual. It details what qualifies as property income, how various receipts are taxed, and key considerations for different property arrangements.
What is Property Income?
Property income encompasses all receipts from exploiting rights over UK land and property. While income from properties owned outside the UK, described as overseas property income, is taxed as foreign income using generally the same computational rules.
The Property Income Manual concept is intentionally broad: taxpayers must include all rents and similar receipts from UK property exploitation, then deduct allowable business expenses (but not capital expenditure) when calculating taxable profits.
The Property Business Concept
Most property income arises within what tax law terms a "property business." This includes:
Rental income from furnished or unfurnished properties
Income from commercial and domestic premises
Receipts from bare land
Both cash payments and payments in kind
Importantly, even single or one-off transactions are treated as arising within a property business. This means occasional lettings are taxable as property income, regardless of whether the arrangement has the organisational structure typically associated with a business.
Income vs Trading
Court precedent has established that income from property rights is generally not trading income. Even when landlords dedicate substantial time to their letting activities, potentially all their working hours. This does not convert rental receipts into trading income. The distinction between exploiting property ownership rights (investment income) and carrying on a trade remains legally significant under UK Property Taxation principles.
Hotels and guesthouses represent an exception, where guest income is normally chargeable as trading income.
Types of Property Business Receipts
Beyond standard rental payments, various other property business receipts form part of property business income.
Deposits and Bonds from Tenants
The treatment of tenant deposits depends on the accounting basis used:
Cash Basis | Non-Cash Basis |
|---|---|
Deposits paid by tenants or licensees may count as receipts when received. The timing of recognition is when the landlord is legally entitled to retain them as for repairs, damage or other recoverable costs. | Deposits should be recognised according to generally accepted accounting practice (GAAP). Typically, this means deferring recognition and matching deposits against the costs they relate to, such as services provided or repairs carried out. When a deposit exceeds the relevant costs and gets refunded, that portion should be excluded from property business receipts. |
Deposits or bonds that are not refunded at tenancy end must be included as income at that point, to the extent they haven't already been recognised.
Waste Disposal Income
Income from granting rights to tip or dispose of waste on land derives from the owner's proprietary interest in the land. The Property Income Manual confirms that this is generally property income rather than a capital receipt.
However, payments may be capital receipts if they represent a once-and-for-all realisation of part of the land's capital value. Case law (McClure v Petre) established that tipping receipts can be capital when there is no possibility of recurrence.
The key test comes from Lowe v J W Ashmore Ltd: receipts for exploiting one aspect of land count as income where payments of the same nature could happen again.
HMRC will only accept these sums as capital receipts when satisfied there is genuinely no possibility of recurrence.
Rent charges, Ground Annuals, and Feu Duties
Rent charges and Ground Annuals:
These are periodic sums payable from land that aren't attributable to tenure. A rent charge differs from lease rent and can apply even to freehold property. Rent charges may be perpetual or for a fixed term. Creating new rent charges has been prohibited since 21 August 1977, subject to minor exceptions under the Rent charges Act 1977.
Feu Duties:
These are annual sums payable for land grants in feu (a Scottish form of tenure). New feu duties and ground annuals have been prohibited since 1 November 1974 under the Land Tenure Reform (Scotland) Act 1974.
All these periodic payments are taxable as property income.
Redemption Payments:
When someone pays to discharge or redeem a rentcharge, ground annual, or feu duty, this payment is normally capital for both payer and recipient. Any tax liability for the recipient falls under capital gains tax, not income tax.
Local Authority Grants and Contributions
The treatment of grants and subsidies from UK government departments, private amenity groups, local authorities, or EU-related bodies follows normal trading income principles as they apply to chargeable property businesses.
Likely Taxable Receipts:
Contributions toward repair expenditure on let properties
Insurance recoveries on policies covering non-payment of rent
Refunds or rebates of property business expenditure
Capital Grants: Grants meeting capital expenditure should normally reduce the qualifying capital expenditure for capital allowances purposes, to the extent the grant relates to items on which capital allowances are claimed.
Furnished Lettings
Under Section 308 of the Income Tax (Trading and Other Income) Act 2005, amounts receivable for using furniture in furnished lettings must be included as property business receipts. This applies when property is let furnished and tenants pay separate sums for furniture use.
Sporting Rights
Sporting rights include rights of fowling, shooting, fishing, or taking/killing game, deer, rabbits, and similar activities. Income from sporting rights is chargeable as property income because it comes from exploiting an interest or rights in land. Examples include:
Fishing license fees
Shooting permit income
Exception
Commercial exploitation of sporting facilities may amount to trading, in which case the income could be included in a trading computation rather than property income. In farming cases, sporting rights income may be included as trading receipts provided the amounts are small.
Game Sales: Profits from selling game are only chargeable if they are trading profits. They are not property business profits as they don't arise by virtue of an interest in or over land.
Other Common Receipts
Additional property business receipts include:
Premiums and lump sums received on granting certain leases
Reverse premiums
Income from letting others use land. For example, where a film crew pays to film inside a house or on land.
Rental income through enterprise zone trust schemes
Income from caravans or houseboats at fixed locations (subject to certain exceptions)
Service charges received from tenants in respect of certain services ancillary to the occupation of property
Excess Renewable Heat Incentive or Feed-in Tariff payments over the cost of providing energy to tenants
Special Property Arrangements
Important Exclusions
Certain types of income are specifically excluded from property business treatment. While this guide covers main categories of chargeable property income, readers should note that HMRC guidance identifies specific exclusions that fall outside property business scope.
