vahid-ahmadi · Oct 7, 2026 · Oct 6, 2026 · Oct 6, 2026 · Oct 6, 2026 · Oct 6, 2026
diff --git a/changelog.d/2170.added.md b/changelog.d/2170.added.md
@@ -0,0 +1 @@
+- Added landlords' residential finance-cost tax reduction (ITTOIA 2005 ss. 272A, 274A and 274AA) from three new optional inputs: `property_rental_income` (gross receipts), `property_finance_costs` and `property_finance_costs_brought_forward`. The reduction is the property basic rate (the basic rate before 2027-28) on the lowest of the relievable costs, the property profits and adjusted total income, is limited to the tax left at Step 5, and reports the unrelieved costs as `property_finance_costs_carried_forward`. A new `disallowed_share` parameter carries the 2017-18 to 2020-21 phase-in, and setting it to nil restores full deductibility. Universal Credit sets the reduction against the tax on property income, not the tax on earnings, and the means tests that count property income (tax credits, Housing Benefit, Income Support, Pension Credit and council tax reduction) count it after finance costs.
diff --git a/changelog.d/2170.fixed.md b/changelog.d/2170.fixed.md
@@ -0,0 +1 @@
+- Stopped the property allowance being deducted on top of expenses already netted out of `property_income` (ITTOIA 2005 Part 6A Chapter 2). It now gives full relief only where profit, or receipts when known, are within the allowance, and partial relief when `property_rental_income` shows that expenses fall short of it. A landlord takes the allowance or the finance-cost reduction, whichever leaves less income tax. The allowance now starts in 2017-18.
diff --git a/docs/book/assumptions/growthfactors.md b/docs/book/assumptions/growthfactors.md
@@ -60,7 +60,7 @@ We derive these rates from OBR GDP growth and ONS population projections.
 |-------------|------|------|------|------|------|------|------|------|
 | Growth rate | 9.2% | 5.0% | 3.8% | 2.8% | 2.8% | 3.1% | 3.3% | 3.3% |
 
-We use per capita GDP for these variables: `capital_gains`, `capital_gains_badr`, `capital_gains_before_response`, `capital_gains_carried_interest`, `capital_gains_residential_property`, `corporate_wealth`, `dividend_income`, `gross_financial_wealth`, `household_lifetime_isa_balance`, `lifetime_isa_balance`, `lump_sum_income`, `main_residence_value`, `maintenance_income`, `miscellaneous_income`, `mortgage_capital_repayment`, `net_financial_wealth`, `non_residential_property_value`, `other_investment_income`, `other_residential_property_value`, `owned_land`, `pension_income`, `private_pension_wealth`, `private_transfer_income`, `property_income`, `savings`, `savings_interest_income`, `sublet_income`
+We use per capita GDP for these variables: `capital_gains`, `capital_gains_badr`, `capital_gains_before_response`, `capital_gains_carried_interest`, `capital_gains_residential_property`, `corporate_wealth`, `dividend_income`, `gross_financial_wealth`, `household_lifetime_isa_balance`, `lifetime_isa_balance`, `lump_sum_income`, `main_residence_value`, `maintenance_income`, `miscellaneous_income`, `mortgage_capital_repayment`, `net_financial_wealth`, `non_residential_property_value`, `other_investment_income`, `other_residential_property_value`, `owned_land`, `pension_income`, `private_pension_wealth`, `private_transfer_income`, `property_income`, `property_rental_income`, `savings`, `savings_interest_income`, `sublet_income`
 
 ## Council tax
 
@@ -80,7 +80,7 @@ We use the OBR's mortgage interest rate index growth rates.
 |-------------|------|------|------|------|------|------|------|------|
 | Growth rate | 26.2% | 48.5% | 22.1% | 13.6% | 12.6% | 8.2% | 4.2% | 4.7% |
 
-We apply this to: `mortgage_interest_repayment`
+We apply this to: `mortgage_interest_repayment`, `property_finance_costs`, `property_finance_costs_brought_forward`
 
 ## Private pension index
 

diff --git a/docs/book/programs/gov/hmrc/income-tax.ipynb b/docs/book/programs/gov/hmrc/income-tax.ipynb
@@ -448,7 +448,7 @@
        "      <td>Property Allowance</td>\n",
        "      <td>Property Allowance</td>\n",
        "      <td>1000.0</td>\n",
-       "      <td>2005-04-01</td>\n",
+       "      <td>2017-04-06</td>\n",
        "      <td>currency-GBP</td>\n",
        "    </tr>\n",
        "    <tr>\n",
@@ -483,7 +483,7 @@
        "15  Personal Savings Allowance      Basic Threshold    1000.0     2005-04-01   \n",
        "16  Personal Savings Allowance     Higher Threshold     500.0     2005-04-01   \n",
        "17          Dividend Allowance   Dividend Allowance    2000.0     2015-06-05   \n",
-       "18          Property Allowance   Property Allowance    1000.0     2005-04-01   \n",
+       "18          Property Allowance   Property Allowance    1000.0     2017-04-06   \n",
        "19           Trading Allowance    Trading Allowance    1000.0     2017-04-06   \n",
        "\n",
        "             Unit  \n",
@@ -638,8 +638,8 @@
     "property_allowance_data = {\n",
     "    \"Attribute\": [\"Property Allowance\"],\n",
     "    \"Type\": [\"Property Allowance\"],\n",
-    "    \"Value\": [property_allowance.values_list[-1].value],\n",
-    "    \"Effective Date\": [property_allowance.values_list[-1].instant_str],\n",
+    "    \"Value\": [property_allowance.values_list[0].value],\n",
+    "    \"Effective Date\": [property_allowance.values_list[0].instant_str],\n",
     "    \"Unit\": [property_allowance.metadata[\"unit\"]],\n",
     "}\n",
     "\n",

diff --git a/policyengine_uk/data/uprating_indices.yaml b/policyengine_uk/data/uprating_indices.yaml
@@ -84,6 +84,8 @@ gov.economic_assumptions.yoy_growth.obr.petrol_spending_litre_proxy:
 - petrol_spending
 gov.economic_assumptions.yoy_growth.obr.mortgage_interest:
 - mortgage_interest_repayment
+- property_finance_costs
+- property_finance_costs_brought_forward
 gov.economic_assumptions.yoy_growth.obr.per_capita.gdp:
 - capital_gains
 - capital_gains_before_response
@@ -110,6 +112,7 @@ gov.economic_assumptions.yoy_growth.obr.per_capita.gdp:
 - private_pension_wealth
 - private_transfer_income
 - property_income
+- property_rental_income
 - savings
 - savings_interest_income
 - sublet_income

diff --git a/policyengine_uk/parameters/gov/dwp/pension_credit/guarantee_credit/income.yaml b/policyengine_uk/parameters/gov/dwp/pension_credit/guarantee_credit/income.yaml
@@ -16,7 +16,7 @@ values:
   - working_tax_credit
   - state_pension
   - private_pension_income
-  - property_income
+  - property_income_after_finance_costs
   - pension_credit_deemed_income
   - esa_contrib
   - jsa_contrib

diff --git a/policyengine_uk/parameters/gov/hmrc/income_tax/allowances/property_allowance.yaml b/policyengine_uk/parameters/gov/hmrc/income_tax/allowances/property_allowance.yaml
@@ -1,8 +1,15 @@
-description: Amount of income from property untaxed per year.
+description: Amount of property allowance, which relieves property receipts in place of deducting actual expenses.
 values:
   2005-04-01:
+    value: 0
+    reference:
+      - title: Finance (No. 2) Act 2017 Sch. 3 para. 13 (allowance has effect from 2017-18)
+        href: https://www.legislation.gov.uk/ukpga/2017/32/schedule/3/paragraph/13
+  2017-04-06:
     value: 1_000
     reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 783BD
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/783BD
       - title: Finance (No. 2) Act 2017 Sch. 3
         href: https://www.legislation.gov.uk/ukpga/2017/32/schedule/3
 metadata:

diff --git a/policyengine_uk/parameters/gov/hmrc/income_tax/income_tax_subtractions.yaml b/policyengine_uk/parameters/gov/hmrc/income_tax/income_tax_subtractions.yaml
@@ -5,7 +5,10 @@ metadata:
   reference:
     - title: Income Tax Act 2007 s. 23
       href: https://www.legislation.gov.uk/ukpga/2007/3/section/23
+    - title: Income Tax Act 2007 s. 26(1)(a)
+      href: https://www.legislation.gov.uk/ukpga/2007/3/section/26
 values:
   0000-01-01:
   - capped_mcad
   - other_tax_credits
+  - property_finance_cost_relief
diff --git a/...ne_uk/parameters/gov/hmrc/income_tax/reliefs/property_finance_costs/disallowed_share.yaml b/...ne_uk/parameters/gov/hmrc/income_tax/reliefs/property_finance_costs/disallowed_share.yaml
@@ -0,0 +1,36 @@
+description: Share of the costs of dwelling-related loans that cannot be deducted in calculating property business profits, and is relieved as a tax reduction instead.
+values:
+  2005-04-06:
+    value: 0
+    reference:
+      - title: Finance (No. 2) Act 2015 s. 24 (inserts the restriction, which has effect from 2017-18)
+        href: https://www.legislation.gov.uk/ukpga/2015/33/section/24
+  2017-04-06:
+    value: 0.25
+    reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 272A(1)
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/272A
+  2018-04-06:
+    value: 0.5
+    reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 272A(2)
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/272A
+  2019-04-06:
+    value: 0.75
+    reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 272A(3)
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/272A
+  2020-04-06:
+    value: 1
+    reference:
+      - title: Income Tax (Trading and Other Income) Act 2005 s. 272A(4)
+        href: https://www.legislation.gov.uk/ukpga/2005/5/section/272A
+metadata:
+  label: Disallowed share of residential property finance costs
+  period: year
+  unit: /1
+  reference:
+    - title: Income Tax (Trading and Other Income) Act 2005 s. 272A
+      href: https://www.legislation.gov.uk/ukpga/2005/5/section/272A
+    - title: Finance (No. 2) Act 2015 s. 24
+      href: https://www.legislation.gov.uk/ukpga/2015/33/section/24
diff --git a/...olicy/baseline/finance/benefit/family/universal_credit/income/uc_earnings_deductions.yaml b/...olicy/baseline/finance/benefit/family/universal_credit/income/uc_earnings_deductions.yaml
@@ -28,6 +28,7 @@
       parent:
         age: 30
         employment_income: 20_000
+        property_rental_income: 5_000
         property_income: 5_000
       child:
         age: 5
@@ -41,7 +42,8 @@
         rent: 9_600
   output:
     # Earnings take the personal allowance first: (20,000 - 12,570) x 20%.
-    # Property income is taxed on (5,000 - 1,000) x 20% = 800, not deducted.
+    # Property income (5,000 of receipts with no expenses) is taxed on
+    # (5,000 - 1,000) x 20% = 800, not deducted.
     income_tax: [2_286, 0]
     uc_income_tax_on_earnings: [1_486, 0]
     # (20,000 - 12,569.96) x 8%.
@@ -59,6 +61,42 @@
     # fix, gave 11,748.50: 0.55 x 800 = 440 too much.
     universal_credit: 11_308.50
 
+- name: The finance-cost reduction comes off the tax on property, not on earnings
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    people:
+      parent:
+        age: 30
+        employment_income: 20_000
+        property_rental_income: 5_000
+        property_income: 5_000
+        property_finance_costs: 3_000
+      child:
+        age: 5
+    benunits:
+      benunit:
+        members: [parent, child]
+    households:
+      household:
+        members: [parent, child]
+        tenure_type: RENT_FROM_COUNCIL
+        rent: 9_600
+  output:
+    # Actual expenses beat the allowance: 5,000 x 20% - 20% x 3,000 = 400 of
+    # tax on property, against 800. The 600 reduction (ITTOIA 2005 s. 274AA)
+    # is limited by the property profits, so it does not come off the tax on
+    # earnings, which stays (20,000 - 12,570) x 20%.
+    property_finance_cost_relief: [600, 0]
+    income_tax: [1_886, 0]
+    uc_income_tax_on_earnings: [1_486, 0]
+    uc_individual_earned_income: [17_919.60, 0]
+    uc_earned_income: 12_795.60
+    uc_maximum_amount: 18_346.08
+    # Unchanged by the finance costs. Taking the 600 reduction off the tax on
+    # earnings would give 10,978.50: 0.55 x 600 = 330 less.
+    universal_credit: 11_308.50
+
 - name: Mixed-age couple, the pensioner's tax on State Pension does not reduce the partner's earnings
   period: 2026
   absolute_error_margin: 0.01
@@ -247,9 +285,11 @@
   input:
     age: 35
     employment_income: 20_000
+    property_rental_income: 5_000
     property_income: 5_000
   output:
-    # Property: (5,000 - 1,000) x 22% = 880.
+    # Property: 5,000 of receipts with no expenses, so (5,000 - 1,000) x 22%
+    # = 880.
     property_income_tax: 880
     income_tax: 2_366
     uc_income_tax_on_earnings: 1_486

diff --git a/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances.yaml b/policyengine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances.yaml
@@ -73,11 +73,20 @@
   output:
     property_allowance_deduction: 100
     taxable_property_income: 0
-- name: Property allowance partial deduction
+- name: Property allowance does not stack on a profit already net of expenses
   period: 2020
   absolute_error_margin: 0
   input:
     property_income: 1001
+  output:
+    property_allowance_deduction: 0
+    taxable_property_income: 1001
+- name: Property allowance partial deduction with receipts and no expenses
+  period: 2020
+  absolute_error_margin: 0
+  input:
+    property_rental_income: 1001
+    property_income: 1001
   output:
     property_allowance_deduction: 1000
     taxable_property_income: 1

diff --git a/...engine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/is_allowance_eligible.yaml b/...engine_uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/is_allowance_eligible.yaml
@@ -47,6 +47,7 @@
 - name: Property Allowance Deduction
   period: 2024
   input:
+    property_rental_income: 3000
     property_income: 3000
     gov.hmrc.income_tax.allowances.property_allowance: 1000
   output:

diff --git a/...uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/property_allowance_deduction.yaml b/...uk/tests/policy/baseline/gov/hmrc/income_tax/allowances/property_allowance_deduction.yaml
@@ -0,0 +1,125 @@
+# Property allowance, ITTOIA 2005 Part 6A Chapter 2 (ss. 783B-783BQ).
+# property_income is profit after actual expenses. The allowance is an
+# alternative to those expenses (s. 783BH(3)), so it may only add the part of
+# the £1,000 that actual expenses have not already used. Receipts within the
+# allowance are fully relieved (s. 783BF).
+
+- name: Landlord with £25,000 profit gets no allowance on top of expenses
+  period: 2027
+  absolute_error_margin: 0.01
+  input:
+    property_income: 25_000
+  output:
+    property_allowance_deduction: 0
+    taxable_property_income: 25_000
+    adjusted_net_income: 25_000
+    # (25,000 - 12,570) * 22% (property basic rate from 2027-28)
+    income_tax: 2_734.60
+
+- name: Profit within the allowance, receipts unknown, is fully relieved
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    property_income: 600
+  output:
+    uses_property_allowance: true
+    property_allowance_deduction: 600
+    taxable_property_income: 0
+
+- name: Profit equal to the allowance, receipts unknown, is fully relieved
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    property_income: 1_000
+  output:
+    property_allowance_deduction: 1_000
+    taxable_property_income: 0
+
+- name: Profit above the allowance, receipts unknown, is taxed as reported
+  period: 2027
+  absolute_error_margin: 0
+  input:
+    property_income: 1_001
+  output:
+    uses_property_allowance: false
+    property_allowance_deduction: 0
+    taxable_property_income: 1_001
+
+- name: Receipts of £900 are fully relieved (s. 783BF)
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    employment_income: 30_000
+    property_rental_income: 900
+    property_income: 900
+  output:
+    property_allowable_expenses: 0
+    property_allowance_deduction: 900
+    taxable_property_income: 0
+    property_income_tax: 0
+
+- name: Partial relief beats £600 of expenses on £5,000 of receipts (s. 783BH)
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    employment_income: 30_000
+    property_rental_income: 5_000
+    property_income: 4_400
+  output:
+    property_allowable_expenses: 600
+    uses_property_allowance: true
+    property_allowance_deduction: 400
+    # 5,000 receipts - 1,000 allowance
+    taxable_property_income: 4_000
+    property_income_tax: 800
+    property_finance_cost_relief: 0
+
+- name: Actual expenses above the allowance leave no extra relief
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    property_rental_income: 25_000
+    property_income: 20_000
+  output:
+    property_allowable_expenses: 5_000
+    property_allowance_deduction: 0
+    taxable_property_income: 20_000
+
+- name: Receipts below profit are inconsistent and treated as unknown
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    property_rental_income: 500
+    property_income: 1_500
+  output:
+    property_allowable_expenses: 0
+    property_allowance_deduction: 0
+    taxable_property_income: 1_500
+
+- name: A property loss gets no allowance and is not taxed
+  period: 2025
+  absolute_error_margin: 0
+  input:
+    property_rental_income: 800
+    property_income: -400
+  output:
+    property_allowance_deduction: 0
+    taxable_property_income: 0
+
+- name: No property allowance before 2017-18
+  period: 2016
+  absolute_error_margin: 0
+  input:
+    property_income: 600
+  output:
+    property_allowance_deduction: 0
+    taxable_property_income: 600
+
+- name: The allowance applies from 2017-18
+  period: 2017
+  absolute_error_margin: 0
+  input:
+    property_income: 600
+  output:
+    property_allowance_deduction: 600
+    taxable_property_income: 0
Original file line number	Diff line number	Diff line change
		@@ -0,0 +1 @@
		- Added landlords' residential finance-cost tax reduction (ITTOIA 2005 ss. 272A, 274A and 274AA) from three new optional inputs: `property_rental_income` (gross receipts), `property_finance_costs` and `property_finance_costs_brought_forward`. The reduction is the property basic rate (the basic rate before 2027-28) on the lowest of the relievable costs, the property profits and adjusted total income, is limited to the tax left at Step 5, and reports the unrelieved costs as `property_finance_costs_carried_forward`. A new `disallowed_share` parameter carries the 2017-18 to 2020-21 phase-in, and setting it to nil restores full deductibility. Universal Credit sets the reduction against the tax on property income, not the tax on earnings, and the means tests that count property income (tax credits, Housing Benefit, Income Support, Pension Credit and council tax reduction) count it after finance costs.
Original file line number	Diff line number	Diff line change
		@@ -0,0 +1 @@
		- Stopped the property allowance being deducted on top of expenses already netted out of `property_income` (ITTOIA 2005 Part 6A Chapter 2). It now gives full relief only where profit, or receipts when known, are within the allowance, and partial relief when `property_rental_income` shows that expenses fall short of it. A landlord takes the allowance or the finance-cost reduction, whichever leaves less income tax. The allowance now starts in 2017-18.