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Tax on Unearned Income

Tax on Unearned Income

I was talking to a bloke in the pub who said that all rental income is taxed at 40% because it is "unearned income".

I said rental income is treated as any other income from self employment and would only be taxed at 40% if the taxpayer is a higher rate taxpayer.

I’m pretty sure I’m right; but as Tax is not my particular area of expertise and the chap I was talking to is adamant about this could someone advise please?

Also what, if any, is the difference for tax purposes between rentals and lettings?


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02nd Mar 2009 10:14

On the whole
the man in the pub is not well informed in tax matters (unless he is a local inspector keeping his head down trying to overhear some interesting comments, as happened to a former colleague of mine many years ago - beware what you say in public places!)

There is no INCOME tax distinction between earned and unearned income in the way that there was many years ago (investment income surcharge, wife's earned income allowance and so on which anyone under 45 has probably never had to know about) but in recent years there have been 2 basic rates 22% and 20% as well as a notional 10% for dividends (although on the whole in practice if you were not a higher rate taxpayer the different rates were not particularly significant for most taxpayers). There is a difference of course for NIC, but that works in favour of unearned. If you have only rental income, then you get your PA against it then 20% then 40% once you are into higher rates. Higher rate is the same (unless you are considering dividends).

In limited situations, there is a difference for CORPORATION tax for close investment holding companies.

Rentals and lettings are the same - see here for a summary of how income from property is treated:

HOWEVER you are incorrect to say that rental income is the same as any other income from self employment. Apart from furnished holiday lettings which if they meet the relevant rules may be accorded the same tax treatment as trading income for many purposes, there are significant differences eg losses on rental income can only be carried forward whereas for trading income can be offset against other income/carried back, certain CGT reliefs do not apply and so on.

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