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If a trader sublets part of his business premises, the rents are treated as trading income to remove any requirement to over complicate the accounts by apportioning expenses.
Points to prove
If a person
- carrying on a trade, profession or vocation
- obtains receipts
- from letting business accommodation
- temporarily surplus to requirements
and
- The accommodation is not trading stock
and
- The rental receipts are for part of a building of which another part is used to carry on the trade
and
- The receipts are relatively small
then
- The trader may bring both the receipts and expenses in to account in calculating the profits of the trade
Legislation
Section 21 Income Tax (Taxaxtion of Other Income ) Act 2005
Meaning of terms
'business accommodation' - the premises cannot be land or residential property
'temporarily surplus' - business property that:
- Was used or acquired within the past three years by the business
- The trader intends to use the property for business purposes in the future
- Subletting is not for more than three years
If the property is temporarily surplus at the beginning of the tax year, the status is retained until the end of the tax year.
'relatively small' - this term is not defined in legislation or HMRC guidance
'letting' includes a licence to occupy
Accounting treatment
Rent is tax treated as trading income and not part of a property business. Any expenses on the surplus accommodation are deducted in the computation of the trading or professional profits and excluded from any separate property rental business.
If any receipts and expenses from subletting surplus accommodation are accounted for in trading profits, all other receipts and expenses of the letting must be dealt with in the same way for as long as the accommodation is temporarily surplus.
Separate property surplus to requirements
If a business has a separate property surplus to requirements and the property is not sublet, rent and other expenses of that property are deducted in computing trading or professional profits.
The test is whether expenses on the surplus property are 'wholly and exclusively' for the purposes of the trade.
Generally, the test is proved if the business took on a lease to use the property.
The test fails if:
- The property is private or owned by a rental business
- Where a former business property became surplus and the lease was renewed to continue subletting or an option to terminate the lease was available but not taken.
If the surplus property is sublet and expenses are deductible in computing trading profits:
- Any rents are taxed as rental income with no deductions for expenses which qualify as expenses of the trade or profession as the 'wholly and exclusively' test fails the rental business
The business can opt to deduct those expenses in the rental instead of their trade so that only the net profit is charged as property income.
Any excess of expenses over receipts from letting the surplus property may be set against trading profits, provided the expenses meet the 'wholly and exclusively' test.
Property Tax Plus director Steve Sims is the author of 'Understanding and Paying Less Tax for Dummies' - packed with strategies for landlords and developers
Copyright Property Tax Plus 2008. All rights reserved.
