J4. Rental income

INCOME TAX

- UK property income charge has priority over trading income charge (ITTOIA s.4(1); CTA 2009 s.201(1))

- e.g. rent received by property developer from land to be developed.

- Trading income charge has priority over overseas property income charge (ITTOIA s.261; CTA 2009, s.287)

- UK property income charge has priority over savings and investment charges (ITTOIA s.366(2))

- UK property income charge has priority over distribution charge (CTA 2009, s.931W)

Legislation: See above.

Cases:

HMRC manuals:

Commentary:

- Mortgage interest is not deductible in computing the profit of the trustee's property rental business.

- Individual's (and discretionary trusts) receive relief at the basic rate (ITTOIA s.274A, s.274B).

- Trustees of an IIP trust will not, on the face of it, receive that relief and so will pay basic rate tax.

- If all of the rental income is used paying the mortgage interest, the trustees will have to pay from elsewhere, e.g. capital.

- An IIP holder is generally taxed on the amount received, in this case nil.

- IIP holder will, however, get refundable credit for the tax paid by the trustees.

- Accordingly, IIP holder gets more than they were entitled to (the refundable credit, effectively paid for by the trustees out of capital).

- Query whether the trustees can benefit from s.274B in their 'representative' capacity.

- Could not apply to opaque IIP income.

Legislation:

Cases:

HMRC manuals:

Commentary:

- Trustee property rental income reduced by non-tax deductible mortgage interest