The property allowance is a £1,000 annual tax exemption for individuals who receive property income. Introduced in April 2017, it simplifies tax for people with modest rental income, particularly those letting out a single property or receiving small amounts from property investments.
The allowance works in two ways depending on how much property income you receive. If your total property income for the tax year is £1,000 or less, you pay no tax on that income and don't need to tell HMRC about it. If your property income exceeds £1,000, you can choose to deduct £1,000 instead of claiming your actual expenses, potentially reducing your tax bill.
What counts as property income for the allowance?
Property income means rental income from letting out property, whether residential or commercial. This includes rent from UK properties and overseas properties.
The allowance applies to income from what HMRC calls a "relevant property business." This excludes businesses where income is received from connected parties or qualifies for rent-a-room relief.
Income that doesn't count:
The property allowance does not apply to certain types of property-related income, even though they may be taxed as property income. Specifically:
Distributions from Real Estate Investment Trusts (REITs) are not eligible. These are taxed in the usual way as property income but cannot benefit from the property allowance.
Property income distributions from authorised investment funds also don't count towards the allowance and continue to be taxed normally.
These exclusions rarely affect ordinary landlords who simply rent out property they own directly.
When does full relief apply?
Full relief applies when your total property income for the tax year doesn't exceed £1,000. Under full relief, your property income is completely exempt from tax.
You don't need to make any election or claim to receive full relief. It applies automatically if your income is within the limit and you meet the eligibility conditions.
If you qualify for full relief and you're not already registered for Self Assessment for other reasons, you don't need to notify HMRC about your property income. This exemption from notification only applies when full relief covers all your property income.
If you already complete a tax return for other income sources, you don't need to report property income that's covered by full relief, though you may choose to do so.
When full relief stops applying:
If your property income increases above £1,000 in a later tax year, you lose full relief from that year onwards. You would then need to register for Self Assessment if you haven't already done so and report your property income on your tax return.
When and why would you choose partial relief?
Partial relief becomes relevant when your property income exceeds £1,000 for the tax year.
Under partial relief, you deduct £1,000 from your gross property income instead of claiming your actual allowable expenses. You then pay tax on the remaining amount.
Why you might choose this: | When partial relief doesn't help: | |
|---|---|---|
Partial relief can benefit you when your actual allowable expenses for the year are less than £1,000. By choosing to deduct £1,000 instead of your lower actual expenses, you reduce your taxable profit.
| If your actual allowable expenses exceed £1,000, you would be worse off claiming partial relief. In that case, claiming your actual expenses produces a lower taxable profit. If your property business makes a loss, partial relief doesn't help because you have no profit to reduce. In fact, claiming partial relief would prevent you from carrying forward your loss, so you should not elect for it when loss-making. |
How do you claim partial relief?
To claim partial relief, you make an election through your Self Assessment tax return. You include your property income on the return but instead of listing your individual expenses, you claim a £1,000 deduction.
The deadline for making this election is the first anniversary of 31 January following the tax year. For the 2024-25 tax year, for example, the deadline would be 31 January 2027.
This election applies only to the specific tax year for which you make it. The election applies only for the relevant tax year and becomes final after the statutory deadline.
Can you opt out of the allowance?
Yes. Even if your property income is £1,000 or less and you would automatically qualify for full relief, you can choose not to use it.
Reasons to opt out:
The main reason to opt out is if your property business makes a loss. If you have a loss, you want to report it so you can carry it forward and use it to reduce future profits.
If you claim full relief, you cannot report a loss. Your income is simply treated as exempt, which means you forfeit any loss relief you could have claimed.
To opt out of full relief, you complete a Self Assessment tax return showing your actual property income and expenses in the normal way. This demonstrates that you're not claiming the relief, even though you could.
Who cannot use the property allowance?
Several categories of taxpayer cannot use the property allowance, even if their income falls within the limits.
Income from connected parties:
You cannot use the property allowance if any of your relevant property income comes from a person or business connected with you. Connected parties include your spouse or civil partner, close family members, business partners, and companies you control or have a significant interest in.
Partners in partnerships:
If your property income includes a share of income from a partnership, you are not eligible to use the property allowance for any of your property income for that tax year. The restriction applies whether or not the partnership includes non-individual members.
Employers providing accommodation:
If you receive rental income from your employer, you are ineligible for the property allowance for any of your property income for that tax year.
Close companies:
If you receive property income from a close company (essentially a company controlled by five or fewer shareholders, or by its directors), that income doesn't qualify for the property allowance.
How does the allowance interact with rent-a-room relief?
Rent-a-room relief is a separate relief for people who let furnished accommodation in their only or main home. The rent-a-room exemption limit is currently £7,500 per year.
The property allowance and rent-a-room relief cannot both apply to the same income. If all your property receipts qualify as rent-a-room receipts and you're eligible for rent-a-room relief, those receipts are excluded from the property allowance entirely.
If you have both rent-a-room income and other property income, you need to consider each type separately:
Your rent-a-room income may be covered by rent-a-room relief (if it doesn't exceed £7,500 and you don't opt out).
Your other property income may be covered by the property allowance (if it doesn't exceed £1,000 and you meet the conditions).
The two reliefs don't interfere with each other when applied to different income streams, but you cannot double up the reliefs on the same rental income.
How does the allowance work with the residential finance cost restriction?
The residential finance cost restriction limits how much mortgage interest and other finance costs you can deduct when calculating taxable profit from residential property lettings. This restriction has applied since April 2017 and became fully effective from April 2020.
The property allowance and residential finance cost restriction are two separate mechanisms that can both apply, depending on your circumstances.
When you use actual expenses:
If your property income exceeds £1,000 and you claim your actual expenses rather than the property allowance, the finance cost restriction applies in the normal way. Your mortgage interest receives tax relief as a 20% tax credit rather than as a deduction from rental income.
When you claim partial relief:
If you elect for partial relief and claim the £1,000 property allowance instead of actual expenses, you don't separately deduct any finance costs because you're not claiming actual expenses at all.
You simply deduct £1,000 from your gross income. In this situation, the residential finance cost restriction doesn't apply because you're not claiming any finance costs to be restricted.
However, you then don't get any relief for your actual finance costs. This means partial relief usually doesn't suit landlords with significant mortgage interest, because they would typically have actual expenses well above £1,000 and would be better off claiming those expenses despite the restriction.
What happens to capital allowances and other reliefs?
Capital allowances are deductions for certain capital expenditure, typically on equipment, machinery, or vehicles used in your property business.
When you claim partial relief: | When you claim acutal expenses: |
|---|---|
If you elect for partial relief and claim the £1,000 property allowance instead of actual expenses, you cannot also claim capital allowances. The £1,000 allowance replaces all expense deductions, including capital allowances. | If you don't use the property allowance and instead claim your actual expenses, you can claim capital allowances in the normal way where they're available. |
Replacement of domestic items relief:
This relief allows you to claim the cost of replacing furniture, furnishings, and household equipment in residential lettings. It operates as an expense deduction.
If you claim partial relief using the property allowance, you cannot separately claim replacement of domestic items relief. The £1,000 allowance covers all expenses and reliefs.
If you claim actual expenses instead of the property allowance, you can claim replacement of domestic items relief where it applies.
Does the allowance affect post-cessation receipts?
Post-cessation receipts are amounts you receive after your property business has permanently ceased, which relate to the period when you were still running the business.
If you receive post-cessation receipts that would have been property income had you still been running the business, these receipts can benefit from the property allowance in the same way that ordinary property income does.
The £1,000 limit applies to post-cessation receipts in the same way it applies to regular property income. Post-cessation receipts may qualify where they would have been relevant property income before cessation.
How does the allowance affect trusts?
The property allowance is only available to individuals. It's not available to trustees or to income arising to a trust.
However, if you're a beneficiary of a trust and the trust pays you property income, how the allowance applies depends on the type of trust.
Does the allowance affect the High Income Child Benefit Charge?
The High Income Child Benefit Charge applies when your adjusted net income exceeds £60,000 (for tax year 2024-25 onwards; lower thresholds applied in earlier years).
Adjusted net income includes your property income. How the property allowance affects this depends on which relief you claim:
Under full relief:
If your property income is £1,000 or less and covered by full relief, it's completely exempt. This means it doesn't count towards your adjusted net income for the High Income Child Benefit Charge.
Under partial relief:
If you claim partial relief, only your net amount after deducting the £1,000 allowance counts towards adjusted net income. Your gross property income minus £1,000 is included.
When claiming actual expenses:
If you don't use the property allowance and claim actual expenses instead, your net property profit (income minus expenses) counts towards adjusted net income in the normal way.
Does the allowance affect student loan repayments?
Income-contingent student loan repayments are calculated based on your income above certain thresholds. Your property income can affect these calculations.
The property allowance affects your reported income for student loan purposes in the same way it affects your taxable income:
Under full relief, property income covered by the allowance is exempt and doesn't count towards the income used to calculate loan repayments.
Under partial relief, your property income minus the £1,000 allowance counts as income for student loan repayment purposes.
If you don't use the allowance and claim actual expenses, your net property profit counts as income for student loan purposes.
Can you have both UK and overseas property income?
If you have both a UK property business and an overseas property business, these are treated as two separate businesses for tax purposes.
The property allowance applies across both businesses combined. You have one £1,000 allowance covering your total relevant property income from both sources, not £1,000 for each.
When determining whether you qualify for full relief, you add together your income from both your UK property business and overseas property business. If the combined total doesn't exceed £1,000, full relief applies to cover all the income.
If you want to claim partial relief when you have both UK and overseas property income exceeding £1,000, you make a single election that applies to both businesses. You must allocate the £1,000 allowance between your UK property business and your overseas property business when calculating the individual profits for each business.
What records should you keep?
Even if your property income is covered by full relief and you don't need to report it, keeping records of your rental income is sensible.
You should retain evidence of the rental income you received during each tax year. This helps you demonstrate that your income stayed within the £1,000 limit if HMRC ever enquires.
If you claim partial relief, you still need to keep records of your income even though you're not claiming actual expenses. The election to use the allowance doesn't remove the requirement to be able to prove the amount of income you received.
If you sometimes claim the allowance and sometimes claim actual expenses, depending on which works better each year, you should keep full records of both income and expenses every year. This allows you to make an informed decision and support whichever method you choose for each tax year.
Should you use the property allowance?
The decision depends on your specific circumstances each year.
