Advanced Taxation (UK) · Income tax: property and investment income

UK Property Business Income: Computation and Losses

Updated 11 October 2026

UK property business income is the profit from all your rental properties, treated as one business. Take rents, deduct allowable revenue expenses, and use cash basis unless you elect for accruals. For residential finance costs, give no deduction; claim a 20% basic rate reduction instead. Losses carry forward against future property profits.

Understand UK Property Business Income: Computation and Losses

An individual's UK rental properties are pooled into a single UK property business. You compute one profit or one loss for the tax year. Profit is taxed as non-savings income at 20%, 40% or 45%. Overseas property is a separate business and is not pooled with it.

The starting point is rent less expenses incurred wholly and exclusively for the letting. Individuals use the cash basis by default: you tax rent actually received and deduct expenses actually paid. An individual can elect for the accruals basis instead. Companies always use accruals. Under accruals, you tax rent due for the year and deduct expenses incurred.

Revenue expenses are deductible: repairs, insurance, agent fees, council tax and utilities paid by the landlord, and advertising. Capital expenditure is not. Improvements, initial furnishing and the cost of the property are capital. For a residential let, the replacement of domestic items relief gives a deduction for replacing furniture, appliances and similar items. It covers the cost of a like-for-like replacement, less any disposal proceeds. It does not cover the first purchase, and it excludes any improvement element. Capital allowances are not available on items in a dwelling house. They are available on plant in commercial property and in common areas of residential blocks.

Finance costs such as mortgage interest on residential property are not deducted in computing profit for an individual. Instead you get a tax reduction at the basic rate, 20%, on the lowest of three amounts: the finance costs (including any brought forward), the property profits, and adjusted total income above the personal allowance. Any excess carries forward. Interest on commercial property is still a normal deduction.

An individual's property business loss is generally carried forward and set against future profits of the same property business. It cannot normally be set against salary or other general income. The one exception is the part of the loss caused by capital allowances (plus certain agricultural expenses). That part can be set against general income of the same tax year (ITA 2007 s120). This relief has conditions:

It covers only the capital allowances element (and certain agricultural expenses), not the rest of the loss.
It is not available where the cash basis is used and capital allowances are not claimed.
It counts towards the cap on income tax reliefs, which limits unrestricted reliefs to the higher of £50,000 or 25% of income.

Companies are different. A company's UK property business loss can be set against its total profits of the same period. Any unused loss is then carried forward, or surrendered as group relief.

The furnished holiday letting regime was withdrawn from 6 April 2025, so for 2025/26 you treat such lets as ordinary property lets. Confirm this against the ACCA examinable documents and the question wording.

Key rules to remember

Property business profit: Rents (cash received or accrued) − allowable revenue expenses − replacement of domestic items relief − capital allowances (commercial only); Deduct only items wholly and exclusively for the letting. Capital items and initial furnishing are not deductible.
Replacement of domestic items relief: Cost of like-for-like replacement (excluding any improvement) − disposal proceeds of old item; Residential lettings only, and only on replacement. Not available alongside capital allowances on the same items.
Finance cost basic rate reduction: 20% × lowest of (finance costs incl. brought forward; property profits; adjusted total income − personal allowance); Residential property, individuals. Unused finance costs carry forward. The reduction comes off the tax liability.
Property business loss: Individual: carry forward against future profits of the same property business. Capital allowance element: can be set against general income of the same tax year (ITA 2007 s120); The rest of an individual's loss cannot be set against general income. A company can set a UK property business loss against its total profits of the same period, then carry it forward or surrender it as group relief.
Capital allowance rates (tax tables): AIA 100% up to £1,000,000; main pool 18%; special rate pool 6%; structures and buildings allowance 3% straight line; The tables give these rates. Use the rates stated in the question and tables.

How to solve UK Property Business Income: Computation and Losses questions

Use this order for any property income question. It keeps the computation and the tax effect separate.

1Identify the taxpayer (individual or company), the type of let (residential or commercial) and the basis (cash or accruals) from the facts.
2List the rents on the correct basis. Under accruals, include rent due but unpaid. Under cash, include rent received in the year, even if it relates to another period.
3Go through each expense. Mark it as revenue (deduct), capital (do not deduct) or finance cost (residential interest is not deducted).
4Deal with furnishings. Residential: allow replacement relief on like-for-like replacements, less sale proceeds. Commercial or common areas: claim capital allowances, including AIA where it fits.
5Add up to a profit or loss. For a loss, state the carry-forward and whether any capital allowance element can be set against general income.
6For residential finance costs, apply the lowest-of-three test and compute 20% of that amount. Deduct it from the income tax liability, not from income.
7Complete the income tax computation at the correct rates and show any carry-forward figures. Show workings with brief reasons.

Quickest way: Rent less revenue costs, then reduction for interest

When to use it: Use this for time-pressed Section A or B questions asking for the property profit and the tax effect.

Write the rent total first, then a list of expenses with a tick or cross against each.
Put the interest to one side straight away and do not deduct it.
Compute profit. Check any loss and note the carry-forward.
Compute 20% of the lowest of finance costs, profit and income above the personal allowance.
Do the tax. Deduct the reduction last. State in one line why a higher-rate taxpayer is worse off.

Common mistakes in UK Property Business Income: Computation and Losses

Deducting residential mortgage interest in the profit computation.
Students treat interest as a normal expense, as for a trader or a company.
Fix: Show it as a separate line outside the profit. Then give the 20% basic rate reduction as a deduction from the tax liability.
Claiming replacement relief on the first furnishing of a property, or on the improvement element of a replacement.
Students see 'furniture' and assume it is always deductible.
Fix: Only replacements qualify. Deduct only the like-for-like cost, and subtract proceeds from selling the old item.
Using the wrong basis for rent, for example taxing accrued rent for an individual on the cash basis.
Students forget that cash is the default for individuals and companies use accruals.
Fix: Check the basis in the question first. Cash basis uses receipts and payments. Accruals uses amounts due and incurred.
Ignoring the lowest-of-three test for the basic rate reduction and always using finance costs.
Students remember '20% of interest' and skip the limits.
Fix: Compute all three amounts: finance costs, property profit, and income above the personal allowance. Take the lowest and carry forward the rest.
Setting the whole of an individual's property loss against salary or other income.
Students confuse property losses with trading loss relief, or with the company rules.
Fix: For an individual, carry the loss forward against future profits of the same property business. Only the part caused by capital allowances can be set against general income of the same tax year (ITA 2007 s120). Only a company can set a whole property loss against total profits of the same period.
Claiming capital allowances on furniture in a residential dwelling.
Students apply the trader's capital allowance rules to every let.
Fix: Allowances are for commercial property and common areas only. Dwelling houses use replacement relief instead.

Worked examples

Example 1

Ravi lets a furnished flat as a residential property and has elected for the accruals basis. For 2025/26, rent due is £30,000, of which £2,000 is unpaid at year end. Costs: repairs £1,800; insurance £600; agent fees £3,000; mortgage interest £4,000; a fridge replaced like-for-like at £700 with the old fridge sold for £100; a sofa replaced at £1,500 where an equivalent basic sofa would have cost £1,000 (the old sofa was scrapped for nil). Compute the property business profit.

Show the solution

Rent: under accruals, tax the rent due, so £30,000 (the £2,000 unpaid is still included).
Repairs £1,800, insurance £600 and agent fees £3,000 are revenue expenses: total £5,400.
Mortgage interest £4,000 is a residential finance cost: not deducted. Treat it under the basic rate reduction.
Fridge: replacement relief is £700 − £100 = £600.
Sofa: only the like-for-like cost qualifies, which is £1,000. The extra £500 is an improvement and is not deducted.
Total deductions: £5,400 + £600 + £1,000 = £7,000.
Profit: £30,000 − £7,000 = £23,000.

Answer: Property business profit is £23,000. The £4,000 mortgage interest is dealt with by the basic rate reduction.

Example 2

Continue with Ravi. He has employment income of £60,000 for 2025/26 and no other income. The question gives the personal allowance as £12,570 (the tax tables provided do not list it, so you must take it from the question). The property profit is £23,000 from the previous example. Compute his income tax liability after finance cost relief.

Show the solution

Personal allowance: £12,570, as given in the question. The tax tables do not show it.
Total income: £60,000 + £23,000 = £83,000.
Taxable income: £83,000 − £12,570 = £70,430.
Tax: basic rate band £37,700 × 20% = £7,540.
Higher rate: £70,430 − £37,700 = £32,730 × 40% = £13,092.
Tax before reduction: £7,540 + £13,092 = £20,632.
Basic rate reduction: lowest of finance costs £4,000, property profit £23,000, and adjusted total income above personal allowance £70,430. The lowest is £4,000.
Reduction: 20% × £4,000 = £800.
Tax liability: £20,632 − £800 = £19,832.

Answer: Ravi's income tax liability is £19,832. He gets relief at 20% instead of his 40% marginal rate on the interest.

Exam tips

Read the requirement for the basis. If the question says nothing, individuals use the cash basis and companies use accruals, but the question may tell you which applies.
Always show the three-way comparison for the finance cost reduction. Markers give marks for stating each amount and picking the lowest.
Write a one-line reason beside each disallowed expense. Professional skills marks reward clear explanation, and it helps you earn technical marks even if a number is wrong.
In scenario questions on a client with several properties, split commercial and residential first. Capital allowances and interest treatment differ.
Take figures and rates from the tax tables. Where the personal allowance is not shown to you, use the figure given in the question.

Practice questions from Income tax: property and investment income

UK Property Business Income: Computation and Losses: frequently asked questions

Is the cash basis compulsory for landlords?

No. Individuals use the cash basis by default and can elect for the accruals basis. Companies always use accruals. Read the question for the basis it states.

Can I deduct mortgage interest on a buy-to-let?

Not in computing profit for an individual with a residential property. You get a tax reduction at 20% of the lowest of finance costs, property profits and adjusted total income above the personal allowance. Interest on commercial property is deducted as normal.

How are property losses relieved?

An individual's property business loss is generally carried forward and set against future profits of the same property business. Only the part caused by capital allowances (plus certain agricultural expenses) can be set against general income of the same tax year (ITA 2007 s120). That relief is not available where the cash basis is used and capital allowances are not claimed. It is also subject to the cap on income tax reliefs, the higher of £50,000 or 25% of income. A company can set a UK property business loss against its total profits of the same period, then carry it forward or surrender it as group relief.

Are furnished holiday lettings still a special category in ATX?

The furnished holiday letting regime was withdrawn from 6 April 2025. For 2025/26 you therefore treat them as ordinary property lets. Check the ACCA examinable documents and the question wording.