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UC and owning a property
Hi there,
I have a query: Client on UC LCWRA, owns his home outright but wants to move in with parents to save on running costs and to get help with his disability. There will be no formal tenancy agreement in place. He’s not sure whether or not to sell or rent it out.
Obviously if he sells it will be classed as capital so advised of the limits
If he rents I advised him of it being classed as income, and it will affect his benefits this way too but unsure if the house will still be subject to surrendering the value of the property and taken in to consideration as capital too on top of that?
Thank you for any help/advice in advance
If he rents the property, why would the value of the property be disregarded as capital?
Unless you can identify a specific disregard that applies to a rented property, then it will be taken fully into account less 10% selling costs.
If he rents the property, why would the value of the property be disregarded as capital?
Unless you can identify a specific disregard that applies to a rented property, then it will be taken fully into account less 10% selling costs.
I see, thank you. That is what I had guessed but unsure as his benefits would already be getting reduced from the income he would be receiving from the same property.
So to clarify: his UC would decreased based on his income from renting out the property, but it would also be tariffed based on the value of the property, and likely would not receive benefits as it would likely be over that 16K threshold? Thank you again!
Income from property does not count as income for UC.
Income from property does not count as income for UC.
Ahh, I see. Would it be possible to direct me to a source? Either way it seems he would not be entitled to income replacement benefits due to the value of the property. Thank you for this info, I very rarely give advice on this and finding myself a little rusty!
It’s not included in the list here: https://www.legislation.gov.uk/uksi/2013/376/regulation/66
See also the ADM, Chapter H5, Paras. H5093-H5094 and H5112. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1061722/admh5.pdf
Copied from CPAG:
Rental and other income from capital
If your capital is treated as giving you tariff income, any actual income you have from the same capital is treated as part of your capital from the day it is due to be paid to you.(1) For example, if you own a property, other than the home in which you live, rent is taken into account not as income but as capital and added to the capital value of the property itself (see also here). However, if the property’s value can be disregarded (see here), there is no tariff income, which means that the rental income is also ignored.(2) Normally, renting out property is not classed as ‘carrying on a trade’ so rental income is not self-employed earnings.(3)
1. Reg 72(3) UC Regs
2. Regs 66 and 72 UC Regs
3. HMRC, Property Income Manual, para 4300 has examples of letting activity constituting a trade
Example:
Khaled owns a flat that he rents out for £1,000 a month, which he uses to pay the mortgage. He does not live in the flat himself so the rent he gets does not count as income for UC but is added to his capital. The flat is valued at £100,000, but only £7,000 counts as capital once his outstanding mortgage is deducted. He has an assumed income of £34.80 (£7,000 + £1,000 = £8,000, £4.35 for each £250 above £6,000 is 8 x £4.35 = £34.80).
I do not know the page as I use online CPAG
Also, ADM H5
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1061722/admh5.pdf , para5112
It’s not included in the list here: https://www.legislation.gov.uk/uksi/2013/376/regulation/66
See also the ADM, Chapter H5, Paras. H5093-H5094 and H5112. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1061722/admh5.pdf
Thank you!
Copied from CPAG:
Rental and other income from capital
If your capital is treated as giving you tariff income, any actual income you have from the same capital is treated as part of your capital from the day it is due to be paid to you.(1) For example, if you own a property, other than the home in which you live, rent is taken into account not as income but as capital and added to the capital value of the property itself (see also here). However, if the property’s value can be disregarded (see here), there is no tariff income, which means that the rental income is also ignored.(2) Normally, renting out property is not classed as ‘carrying on a trade’ so rental income is not self-employed earnings.(3)1. Reg 72(3) UC Regs
2. Regs 66 and 72 UC Regs
3. HMRC, Property Income Manual, para 4300 has examples of letting activity constituting a tradeExample:
Khaled owns a flat that he rents out for £1,000 a month, which he uses to pay the mortgage. He does not live in the flat himself so the rent he gets does not count as income for UC but is added to his capital. The flat is valued at £100,000, but only £7,000 counts as capital once his outstanding mortgage is deducted. He has an assumed income of £34.80 (£7,000 + £1,000 = £8,000, £4.35 for each £250 above £6,000 is 8 x £4.35 = £34.80).I do not know the page as I use online CPAG
Also, ADM H5
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1061722/admh5.pdf , para5112
Thank you!
Just to run through this fully with apologies for duplication.
The first thing is what the house (or his interest in it at least) is actually worth. If its in negative equity, or he is on some interest only mortgage and has no actual equity in the house, then it could be that capital is not actually an issue at all.
If he lets out the property, then the rent is treated as capital and the capital value of the house is taken into account. There are cases where a person is in the letting business and therefore their properties are treated as business assets and are disregarded for that reason (UC Regs, sch 10, para 7), but this is not one of those cases because he would just be letting out a single property. There is unlikely to be any other disregard which applies in this case.
If he markets the property for sale, then the value of it will be disregarded whilst its up for sale (para 6). Once he has the proceeds of the sale in hand, then that will be treated as capital, unless he proposes to use those funds to buy another house in which case they may be disregarded again (para 13).
I do have to point out, with my housing hat on, that “I’ll just let out this property” is actually a major commitment and involves meeting all kinds of costs and regulatory requirements (in Newcastle in particular, its likely to involve a requirement to obtain a licence from the council which comes with a cost) and it is not something to jump into lightly.
There are cases where a person is in the letting business and therefore their properties are treated as business assets and are disregarded for that reason (UC Regs, sch 10, para 7), but this is not one of those cases because he would just be letting out a single property. There is unlikely to be any other disregard which applies in this case.
Just on this:
The rules for UC are different to legacy benefits, and the old “property business” escape route would no longer work (in virtually all cases), as this disregard requires it to be a “trade”, rather than simply a “business”.
The CPAG handbook has always, incorrectly, said it would work, which always bugged me, but I was pleased to see that they corrected it this year.
My version of Sweet and Maxwell (from 20/21) also makes this mistake, but I was told by Judge Mesher last year that it would be corrected, perhaps already for the 22/23 edition.
Thanks Charles, that’s very interesting - I had not appreciated that the position was any different to that under legacy benefits (although I am apparently in good company in that regard).
Of course, there would be no question of the disregard applying in this particular case under either system.
Just on this:
The rules for UC are different to legacy benefits, and the old “property business” escape route would no longer work (in virtually all cases), as this disregard requires it to be a “trade”, rather than simply a “business”.The CPAG handbook has always, incorrectly, said it would work, which always bugged me, but I was pleased to see that they corrected it this year.
My version of Sweet and Maxwell (from 20/21) also makes this mistake, but I was told by Judge Mesher last year that it would be corrected, perhaps already for the 22/23 edition.
A diversion from the original question, but do you think there are other types of ‘businesses’ that would be seen as a trade?
Interesting comments about “trade”, and it is very much Charles’s area of expertise. In Schedule 10, the relevant paragraphs come under the heading “business assets” and the disregard covers assets used for a “trade, vocation or profession”. This suggests that, in UC at least, “business” is a generic term for trade, vocation and profession. So the question is not whether the claimant is pursuing a trade as distinct from a business as they are not two separate things. Trade is a subset of business. Being a trade, vocation or profession is what makes it a business.
Whereas in the legacy benefits, “business” for capital disregard purposes means something done to generate self-employed earnings, which in turn means any gainful employment neither under a contract of service nor as an office holder.
Is there really that much difference? How easy is it to be in gainful employment as a self-employed earner without pursuing a trade, profession or vocation?
Just on this:
The rules for UC are different to legacy benefits, and the old “property business” escape route would no longer work (in virtually all cases), as this disregard requires it to be a “trade”, rather than simply a “business”.The CPAG handbook has always, incorrectly, said it would work, which always bugged me, but I was pleased to see that they corrected it this year.
My version of Sweet and Maxwell (from 20/21) also makes this mistake, but I was told by Judge Mesher last year that it would be corrected, perhaps already for the 22/23 edition.
I can see that if the capital is disregarded as assets used for a trade, profession or vocation, then the rent has to be accounted for in earned income (Reg 52(a)(ii)). But what is stopping somebody in this situation setting themselves up as a professional landlord (as a sole trader)? Is it something to do with the definitions of “trade, profession or vocation”?
I do have to point out, with my housing hat on, that “I’ll just let out this property” is actually a major commitment and involves meeting all kinds of costs and regulatory requirements (in Newcastle in particular, its likely to involve a requirement to obtain a licence from the council which comes with a cost) and it is not something to jump into lightly.
I completely agree. Please don’t be another amateur landlord who doesn’t understand their responsibilities and hasn’t budgeted for all the costs of licensing, maintenance and property management.
Interesting comments about “trade”, and it is very much Charles’s area of expertise. In Schedule 10, the relevant paragraphs come under the heading “business assets” and the disregard covers assets used for a “trade, vocation or profession”. This suggests that, in UC at least, “business” is a generic term for trade, vocation and profession. So the question is not whether the claimant is pursuing a trade as distinct from a business as they are not two separate things. Trade is a subset of business. Being a trade, vocation or profession is what makes it a business.
Whereas in the legacy benefits, “business” for capital disregard purposes means something done to generate self-employed earnings, which in turn means any gainful employment neither under a contract of service nor as an office holder.
Is there really that much difference? How easy is it to be in gainful employment as a self-employed earner without pursuing a trade, profession or vocation?
I agree that “trade” is a subset of “business”.
However, I don’t think it is correct to say that there isn’t much difference. Many property businesses are businesses, but are certainly not trades.
The three tiers discussed here is a good starting point for all this.
Legacy benefits would require something like tier 2, whereas UC requires tier 3.
RM v Sefton Council is very useful for all this.
I can see that if the capital is disregarded as assets used for a trade, profession or vocation, then the rent has to be accounted for in earned income (Reg 52(a)(ii)). But what is stopping somebody in this situation setting themselves up as a professional landlord (as a sole trader)? Is it something to do with the definitions of “trade, profession or vocation”?
Yes, “trade” is far more limited, and even a professional landlord will almost always not be carrying on a “trade”. See here .
A diversion from the original question, but do you think there are other types of ‘businesses’ that would be seen as a trade?
Most businesses will be trades. It will only generally be property or investment businesses which usually aren’t.
Where it can get interesting is where someone has income from some ad-hoc work, but which doesn’t reach the level of being a trade.
For tax purposes, such income is taxed under Part 5 of ITTOIA. This should mean that it would count as UNEARNED income for UC (see Reg 66(1)(m) of the UC Regs), which certainly seems unfair.
Alternatively, it could be argued that it falls within Reg 52(a)(iii), and therefore implicitly must be excluded from being unearned income.
[ Edited: 2 Jun 2023 at 11:48 am by Charles ]Thanks Charles
Interesting, I hadn’t realised that “trade” would be such a high threshold - doing extra work on site like preparing meals and cleaning rooms etc
Also worth seeing Reg 77 of the UC Regs which specifically differentiates between trades and property businesses, although in the context of limited companies. (It was actually the commentary to this Reg in Sweet and Maxwell which was wrong, but I have been told was corrected in later editions.)
This has been quite an education, great stuff Charles! I would have casually misread Reg 77 as providing for a capital disregard in all cases where a company is treated as a self-employed business, whether trade or otherwise. But it carefully distinguishes doesn’t it. If your company is carrying on a property business that isn’t a trade, you are treated as if you own the property assets, as distinct from the shares in the company which would be more difficult to value ... but those assets ain’t disregarded!
Yup, precisely.
To be fair, I do understand the rationale behind this.
What I would like though is to see the £6k/£16k thresholds increased. They’ve been at that level for 17 years now…
What I would like though is to see the £6k/£16k thresholds increased. They’ve been at that level for 17 years now…
That’s exactly what I was thinking. The £16K threshold would be about £26K if it had gone up in line with inflation.
And thanks for the very interesting trip into the world of trades and businesses.
Thanks Charles
Interesting, I hadn’t realised that “trade” would be such a high threshold - doing extra work on site like preparing meals and cleaning rooms etc
So perhaps the advice to the client now is not to rent the property out, but set up a B&B instead (but presumably not AirBnB)?
I do have to point out, with my housing hat on, that “I’ll just let out this property” is actually a major commitment and involves meeting all kinds of costs and regulatory requirements (in Newcastle in particular, its likely to involve a requirement to obtain a licence from the council which comes with a cost) and it is not something to jump into lightly.
I completely agree. Please don’t be another amateur landlord who doesn’t understand their responsibilities and hasn’t budgeted for all the costs of licensing, maintenance and property management.
100% agree too!
Thank you for all of the replies on this, very interesting!