Model landlords' property income from receipts, expenses and finance costs: the property allowance election, the s. 274A finance-cost reduction and its carry-forward #2170

Summary

PolicyEngine UK holds one landlord input, property_income (variables/input/property_income.py, labelled "rental income", uprated by obr.per_capita.gdp). Both datasets that feed it, the enhanced FRS and Microcosm UK, fill it from the SPI's INCPROP. The SPI Public Use Tape documents INCPROP as net income from UK and overseas property (income less expenses). HMRC's notes to SPI Table 3.7 define it as profit after allowable expenses and before residential finance costs; landlords have been unable to deduct any finance costs since 2020-21.

Without more inputs, the model cannot apply three rules:

1. The property allowance is deducted on top of expenses already netted off. property_allowance_deduction returns min(property_income, £1,000) and taxable_property_income subtracts it (Property allowance is deducted on top of expenses already netted from property income #1900). ITTOIA 2005 Part 6A Chapter 2 gives either full relief when receipts are at most £1,000 (s. 783BF: neither receipts nor expenses are brought into account) or, by election (s. 783BK), the allowance instead of expenses (s. 783BH: "no relevant expenses are brought into account"). Partial relief cannot create a loss (s. 783BI(4)), rent-a-room receipts are excluded (s. 783BB), and the allowance is not available where a s. 274A reduction is applied (s. 783BL). On the 2024 Microcosm UK build the stacked allowance removes about £2.76bn from the taxable base across 2.87m landlords. Stop stacking the trading allowance on expenses already netted from profit #1881 fixed the same defect for the trading allowance with an optional receipts input.
2. The residential finance-cost restriction and its tax reduction are not modelled. Since 2020-21 no finance costs of dwelling-related loans are deductible (s. 272A; the phase-in disallowed 25%, 50% and 75% in 2017-18 to 2019-20). Instead the individual gets a tax reduction (s. 274A, s. 274AA). The amount relieved is the lowest of three amounts: the relievable amount (the current year's non-deductible costs plus any brought-forward amount), the property business profits for the year, and adjusted total income (net income less savings and dividend income, less allowances). It is multiplied by the property basic rate, and whatever is not relieved is carried forward.
   • The only hook today is the bare input other_tax_credits, whose docstring lists "landlord tax relief". The enhanced FRS leaves it at zero; only policyengine-uk-data's standalone SPI dataset sets it, from TAX_CRED.
   • The SPI tape carries the costs that got relief: LLIR_RESTRICT_AMT_TOT, 1.11m landlords and £5.77bn in 2022-23, with TAX_CRED equal to 20% of it. HMRC's Property Rental Income Statistics 2026 report £12.82bn declared by 1.15m landlords for 2024-25 (all unincorporated landlords).
   • Omitting the reduction overstates landlords' income tax by between £1.2bn and £2.6bn a year.
3. From April 2027 the reduction is given at the property basic rate of 22% outside Scotland. GOV.UK's "Changes to tax rates for property, savings and dividend income" says finance cost relief will be provided at the separate property basic rate (22%), and the property rates are rUK rates, not applicable to Scotland. parameters/gov/hmrc/income_tax/rates/property.yaml already carries 22%, 42% and 47% from 2027-04-06 for the rates on property income (Add November 2025 Autumn Budget income source tax rate increases #1395).

HMRC's statistics give both sides. The SPI gives net profit. The rental statistics give gross receipts (£49.81bn for individuals in 2024-25) and expenses (£30.03bn for individuals; residential finance costs £12.82bn for all entities). Microcosm UK will supply receipts and finance costs per landlord once the model reads them (PolicyEngine/microcosm#1106).

Proposed variables

Inputs (Person, YEAR, GBP):

• property_rental_income: gross rents and other receipts of the UK property business before any expenses, excluding rent-a-room receipts (those go through Model rent from boarders, lodgers and sub-tenants for the householder #2002's sublet_income route).
  • It is optional, as self_employment_gross_receipts is (Stop stacking the trading allowance on expenses already netted from profit #1881). Zero means unknown, and receipts below property_income are inconsistent and treated as unknown, so datasets that store only property_income keep working.
  • Uprating: either property_income's own index (obr.per_capita.gdp), as Stop stacking the trading allowance on expenses already netted from profit #1881 does for self-employment receipts, which keeps the implied expenses' share fixed; or a rents index (ons.private_rental_prices.UNITED_KINGDOM or obr.rent). Add it to data/uprating_indices.yaml as well.
• property_finance_costs: the current year's costs of dwelling-related loans that s. 272A disallows (interest and incidental costs of residential lettings). Uprating: obr.mortgage_interest, in both the class attribute and uprating_indices.yaml.
• property_finance_costs_brought_forward: the s. 274AA brought-forward amount, default 0.
• property_income keeps its meaning: profit after allowable expenses, before finance costs. Its uprating is unchanged. Relabel it, since "rental income" reads as receipts.

Formulas (Person, YEAR):

• property_allowable_expenses = max(0, property_rental_income − property_income) when receipts are known, else 0. These are expenses excluding finance costs; the s. 272A disallowed costs are not in them.
• property_allowance_deduction, rewritten against ss. 783BD, 783BF, 783BH, 783BI(4) and 783BL. The current reference to s. 783AF is a trading-allowance section.
  • With receipts known: full relief when property_rental_income <= allowance, so taxable property income is 0. Otherwise the allowance replaces expenses only when that is better for the taxpayer and no s. 274A reduction is taken (s. 783BL). On the allowance route the deduction is max(0, min(property_income, allowance − expenses)), the Stop stacking the trading allowance on expenses already netted from profit #1881 formula; on the expenses route it is 0.
  • With receipts unknown: full relief only when property_income <= allowance (the Property allowance is deducted on top of expenses already netted from property income #1900 fallback), and no stacking otherwise.
• taxable_property_income = max(0, property_income − property_allowance_deduction). The route is the one with the lower income tax: the allowance route takes no finance-cost reduction, and the expenses route takes expenses plus the reduction. Both routes change only property income and the reduction, so the comparison can be closed-form or use branches as Model Marriage Allowance as the statutory s.55B transfer and Step 6 reduction #1963 does for the Marriage Allowance election.
• property_finance_cost_relief (ITTOIA 2005 s. 274A, s. 274AA) = rate × min(relievable, property_profits, adjusted_total_income), where:
  • relievable = property_finance_costs + property_finance_costs_brought_forward;
  • property_profits = taxable_property_income (after s. 118 losses, which the model does not carry);
  • adjusted_total_income = max(0, adjusted_net_income − taxable_savings_interest_income − taxable_dividend_income − allowances), the quantity property_income_tax already forms as non_savings_after_allowances;
  • rate is gov.hmrc.income_tax.rates.property.basic for rUK taxpayers (20%, then 22% from 2027-04-06) and the UK basic rate for Scottish taxpayers. The implementer should confirm the Scottish rate in the Finance Act text.
  • It is zero where property_rental_income == 0 and property_finance_costs == 0, and zero on the allowance route.
• property_finance_costs_carried_forward = relievable − min(relievable, property_profits, adjusted_total_income). This is s. 274AA's brought-forward amount for the following year, for multi-year datasets.

Wiring:

• Append property_finance_cost_relief to parameters/gov/hmrc/income_tax/income_tax_subtractions.yaml as a Step 6 reduction.
• Cap it at the Step 5 tax left after other reductions (income_tax_pre_charges), so it cannot reduce CB_HITC or the pension charges. capped_mcad caps at income_tax_pre_charges + CB_HITC, so it is not the template. Model Marriage Allowance as the statutory s.55B transfer and Step 6 reduction #1963 adds a Step 5 limit (marriage_allowance_tax_reduction_limit, ITA 2007 s. 29) that this reduction should share if Model Marriage Allowance as the statutory s.55B transfer and Step 6 reduction #1963 lands first.
• Universal Credit. uc_income_tax_on_earnings takes every item on income_tax_subtractions off the tax on earnings first. This reduction is computed on, and capped at, property profits, so it should come off the tax on property income. Otherwise a landlord's finance costs would cut the UC deduction for tax on their earnings and so cut their UC.
• Remove "landlord tax relief" from the other_tax_credits docstring once this lands.

Parameters:

• gov.hmrc.income_tax.reliefs.property_finance_costs.disallowed_share: 0.25 (2017-04-06), 0.50 (2018-04-06), 0.75 (2019-04-06), 1.00 (2020-04-06). Reference s. 272A as inserted by FA 2015 s. 24 and F(No.2)A 2017 Sch 2 para 19. Only the 100% value matters for current years; the schedule documents the restriction.
• allowances/property_allowance.yaml: start the £1,000 at 2017-04-06 (F(No.2)A 2017 Sch 3 para 13), not 2005-04-01 (Property allowance is deducted on top of expenses already netted from property income #1900).
• The relief rate reads rates.property.basic; no new rate parameter.

Tests

• YAML tests:
  • receipts £900: no tax on property;
  • receipts £5,000 and expenses £600: the allowance route beats expenses, with no finance-cost relief;
  • receipts £20,000, expenses £6,000 and finance costs £8,000: the expenses route, with relief of 20% × £8,000 in 2025, 22% in 2027 for rUK, and 20% for a Scottish taxpayer;
  • relief limited by property profits: £3,000 profit and £8,000 finance costs give relief on £3,000, with £5,000 carried forward;
  • relief limited by adjusted total income: a landlord inside the personal allowance;
  • the fallback, with only property_income set: today's result for profits above £1,000 and full relief below it;
  • a UC claimant with earnings and finance costs: the UC deduction for tax on earnings does not move with the finance costs.
• Hypothesis properties:
  • property_allowance_deduction ≤ £1,000;
  • the allowance never stacks on expenses: taxable income ≥ receipts − max(expenses, £1,000) when receipts exceed £1,000;
  • property_finance_cost_relief ≤ rate × (property_finance_costs + property_finance_costs_brought_forward) and ≤ income_tax_pre_charges;
  • carried forward + relieved = relievable;
  • income tax is non-increasing in property_finance_costs;
  • the route choice never raises tax above either route alone.
• Statutory references on every variable: ss. 272A, 274A, 274AA, 783BB, 783BD, 783BF, 783BH, 783BI, 783BK and 783BL.
• Revenue effect measured on the published enhanced FRS and on Microcosm UK: income tax with and without the reduction, and with the allowance election corrected. Expect £1.2–2.6bn less income tax from the reduction, partly offset by the allowance no longer stacking.

Data notes

• The enhanced FRS can fill property_finance_costs from the SPI tape's LLIR_RESTRICT_AMT_TOT today, and leave property_rental_income at 0 until it imputes receipts. Microcosm UK will supply both (UK: model landlord property income on the taxable (net of expenses) concept, not rent received microcosm#1106).
• Rent-a-room receipts stay out of property_rental_income. Model rent from boarders, lodgers and sub-tenants for the householder #2002 routes sublet_income and rent from boarders and lodgers with the £7,500 limit.
• Losses: the model has no property-loss input, and s. 118 loss relief stays out of scope.

Sources: ITTOIA 2005 ss. 272A, 274A, 274AA and 783B–783BQ (legislation.gov.uk); HMRC SPI Table 3.7 notes (2023-24); SPI Public Use Tape 2022-23 documentation (UKDS SN 9422); HMRC Property Rental Income Statistics 2026; HMRC SA105 notes 2026; GOV.UK, "Changes to tax rates for property, savings and dividend income". Related: #1900, #1881, #1963, #2002, #1395, PolicyEngine/microcosm#1106.