Rental income from a sub-lease

by **Barry Corbett** on Tue Jul 12, 2011 6:26 pm

Help please!

I lease a factory (I don't own the factory) and I sub-let, on a licence, about one tenth of the space to another company; at less than I am paying the landlord. My tax accountant is telling me that this income is counted as Schedule A income and therefore I can not off-set my b/fwd trading losses against this income. I can't believe that I am having to pay tax on sub-letting a small part of the building that I am just leasing, particularly when I am making a loss on the transaction! Surley there is a way of classifying this as schedule E income. The sub-let is probably fairly permenant.

Thanks to anybody that can help me.

by **Incredulum** on Wed Jul 13, 2011 9:42 am

Don't entirely understand you.

1. Why do you lease the factory? What do you do with it?

2. How much is the annual rental for the entire factory?

3. How much rent do you receive for the proportion of the factory you sublet?

4. What do you mean by Schedule E income? This is (was) employment income, i.e. salary, and it appears very unlikely that this has anything to do with either the leasing of a factory or anything that might happen inside it.

by **Barry Corbett** on Wed Jul 13, 2011 10:40 am

Thanks for replying.

1/. We are a manufacturing company in the packaging industry

2/. The annual rental of the entire factory is £95,000

3/. The 'rent' we receive for the proportiuon of the factory sublet is £23,000 but this includes rent, rates, electric, gas and water.

4/. Sorry I got the wrong schedule income. I meant to say Schedule D Case 1 income.

Any help would be greatly appreciated.

by **Incredulum** on Wed Jul 13, 2011 2:46 pm

3. So you are making a healthy profit on the 10% you rent out.

Anyway, yes, I'm afraid that as this is permanently rented out, you will pay tax on the income as property income(Schedule A), not as trading income. You can deduct 10% of your rent, and presumably 10% (or other sensible amount) of the other costs you mention.

Sorry. You cannot offset b/fwd trading losses against current year property income.

http://www.hmrc.gov.uk/manuals/pimmanual/pim4300.htm allows the treatment of rent as trading income if the letting is a temporary thing only.

by **Barry Corbett** on Wed Jul 13, 2011 2:51 pm

... many thanks.

What if we reduced the rent for the sublet - so that we made a loss. Would this make a difference?

by **Incredulum** on Wed Jul 13, 2011 3:48 pm

If you reduce the rent for the sublet so make a loss then you have a Schedule A loss that is only any use against future Schedule A income.

Rememeber, every 26.5p (28p, 20p, whatever) of tax you pay has generated you 72-80p of profit.

by **Barry Corbett** on Wed Jul 13, 2011 4:55 pm

.... many thanks for all of your help

by **Chanmuganathan** on Wed Jul 13, 2011 8:16 pm

Why can’t it be treated as a cost sharing (factory rent) agreement and deducting against rental expenses.
Which means, in the company accounts it will reduced the rental costs and will end up in trading profit/(loss).
My Arguments as follows:
1) The income (rental income) arise entirely as the result of the trade and the company has made no investment/intention to earn such income(it is an incidental income as the result of trade) .
2) Without trade such income never arise.
3) Until last year, FHL also treated as trading income.