Two new allowances – the trading allowance and the property allowance – were introduced in 2017. Applying from the 2017/18 tax year onwards, this self-assessment filing season is the first time that individuals should be able to claim either, or both, allowances.
While in principle these two allowances offer new and enticing tax breaks for individuals, there are some pitfalls that accounting firms should be aware of when advising their clients about whether to claim them.
The property allowance
The property allowance is a £1,000 tax exemption that individuals can use against income from land or property.
Generally, the allowance can be claimed against a variety of property income sources, for example, property income generated in the UK or overseas, as well as commercial or residential rental income.
An additional benefit of the allowance is that, in cases where a property is jointly owned, each owner can claim their own £1,000 allowance against their share of gross property income.
The trading allowance
The trading allowance is a £1,000 tax exemption, separate to the property allowance, that is available to individuals with trading and miscellaneous income derived from sources such as self-employment, casual work (e.g. babysitting or online selling), and hiring personal equipment.
The trading allowance cannot be claimed on any trading income from a partnership.
Claiming the allowances
There are several ways that the trading and property allowances can be used:
An individual’s gross property or trading income for a tax year is £1,000 or less
The relevant allowance should exempt the amount of income from income tax. This is known as “full relief”.
An individual’s gross property or trading income for a tax year is more than £1,000
Under this scenario, an individual can choose to:
- Claim the relevant allowance against their gross income. Under this option, no other deductions or expenses can be taken; or
- Not claim the relevant allowance and instead claim their actual expenses against their relevant gross income.
Although the property and trading allowances should be available to a large number of individuals, there are certain circumstances where the allowances cannot be claimed.
For example, the allowances cannot be claimed in a tax year in cases where an individual has trade or property income from:
- Their employer or the employer of their spouse/civil partner;
- A partnership in which the individual or someone connected to them is a partner;
- A company that the individual or someone connected to them owns or controls.
Additionally, HMRC states that the property allowance cannot be used “on income from letting a room in your own home under the Rent a Room Scheme.”
On paper, both the property and trading allowances seem like a gift to any individuals that work in the “gig” economy, or who generate small amounts of income each year, for example, from letting out property via an online platform.
However, accounting firms should be aware of the following technicalities of these new reliefs:
It may still be beneficial to file a tax return
If a self-employed individual has property or trading expenses of less than £1,000, then claiming the relevant allowance may exempt them from having to file a self-assessment tax return.
However, in some instances, it may be better for that self-employed individual to submit a self-assessment tax return, for example, if they:
- Would like to pay Class 2 National Insurance Contributions;
- Would like to claim loss relief; or
- Would like to claim the maternity allowance or tax-free childcare.
Cases where an individual has expenses greater than £1,000
Although both allowances can be useful in instances where an individual has expenses of less than £1,000, taxpayers may find themselves worse off if they claim an allowance when they have expenses in excess of this amount.
To give an example, let’s assume that Jenny, a sole trader, generates gross trading income of £5,000 during the 2017/18 tax year and has trading expenses of £2,000.
If Jenny claims the trading allowance, then she should only be able to deduct £1,000 from her gross trading income, leaving her with a taxable profit of £4,000.
However, if Jenny chooses not to use the trading allowance and claims her actual trading expenses, she would only have a taxable profit of £3,000.
The fact that claiming either the property or trading allowance might actually penalise some taxpayers has not gone unnoticed.
The Low Incomes Tax Reform Group (LITRG) published a press release in June 2018, noting that self-employed individuals who also have secondary income from a small business should tread carefully when considering whether to claim the trading allowance. This is because the trading allowance, if claimed, is applied to all sources of trading income.
Robin Williamson, the LITRG Technical Director, provides an example in the LITRG’s press release that summarises the predicament nicely:
“[…] take a self-employed shopkeeper with income of £30,000 and expenses of £18,000 from the shop business, but also casual income of £1,000 from occasionally stewarding at local events. One might think that he would pay tax on only the £12,000 profit from the shop as the stewarding income could benefit from the trading allowance – but this is not the case. If this shopkeeper claimed the trading allowance to exempt the stewarding income of £1,000, the expenses of £18,000 would not be allowable for the main self-employment and the taxable profit would be £30,000; this would be a costly mistake to make.”
Clearly, in the case of the above example, the self-employed shopkeeper would be much better off not claiming the trading allowance at all.
Although many individuals, particularly those who dabble in casual work and the “gig” economy, may benefit from the new trading and property allowances, accounting firms need to take care when advising their clients about whether to claim these allowances, particularly in cases where an individual has multiple businesses or large business expenses.
For further information about the trading and property allowances, or to find out more about how to claim the allowances on a client’s self-assessment tax return using Taxfiler, speak to a member of the Taxfiler team.