Key points
- Rental losses are calculated in the same way as rental profits.
- Losses can be carried forward and set against profits of the same rental business.
- Losses on furnished holiday lettings can now only be set against profits from same furnished holiday lettings business
A property rental business is taxed on its profits. However, not all rental businesses will make a profit. Where the rental business returns a loss, it may be possible to relieve the loss.
Calculating a loss
Before considering how a loss can be relieved, it is necessary to establish whether the business has made a loss.
Under the rules for taxing rental income, the property rental business is considered as a whole and the income and expenditure from all properties forming part of that business are taken together to determine the profit or loss for the business as a whole.
For tax purposes, all sources of income from land and property in the UK are generally regarded as deriving from the same single property rental business. This offers a number of advantages. One of these is in relation to expenses as the rules effectively allow expenses incurred in relation to one property to be offset against income from another. It should be noted, however, that separate rules apply to furnished holiday lettings, which are discussed below.
This means that if a person lets out a number of properties, which incurs a loss in relation to one property, this is automatically offset against the profits of another. A loss may arise, for example, if the property remains unlet as expenses, such as mortgage interest, insurance, etc., are still incurred if a property is empty. The global calculation of all profits and losses provides automatic relief for a loss on a particular property.
Example 1 – Overall profit
Carol has five properties in the UK which she lets out unfurnished. None meets the tests for furnished holiday letting.
In 2012/13, the following rental income is received and expenses incurred in relation to each of the properties.
Property Rental Income Expenses Profit / (Loss)
1 £7,000 £5,000 £2,000
2 £12,000 £6,000 £6,000
3 £4,000 £5,500 (£1,500)
4 £2,000 £3,000 (£1,000)
5 £10,000 £5,000 £5,000
Total £35,000 £24,500 £10,500
Properties 3 and 4 made a loss in the year. However, the rental business is treated as a whole, relief for these losses is given automatically against the profits made by properties 1, 2 and 5. The rental business as a whole makes a profit and Carol will pay tax on the profit of £10,500. There is no need to claim relief for the losses on individual properties.
Trap
It should be noted that relief for losses is only available where the loss arises in respect of ordinary commercial letting. Where a property is let out on terms that are not commercial, for example to a friend or a relative for a nominal rent, expenses incurred can only be deducted up to the amount of the rent received for that property. Excess expenses incurred in relation to a property that is let uncommercially cannot create a loss
A rental loss will arise for the business as a whole where total expenses in the year exceed total rental income.
Example 2 – Overall loss
Louis has two flats in the UK that he rents out. In the year to 5 April 2013 he receives rental income and incurs expenses in relation to the flats as follows:
Flat Rental income Expenses Profit/(loss)
1 £2,000 £7,000 (£5,000)
2 £3,000 £2,500 £500
Total £5,000 £9,500 (£4,500)
Although the loss from Flat 1 is partly offset against the profit on flat 2, the rental business as a whole makes a loss of £4,500. This is available for relief.
Carry forward of losses
Unfortunately, there is not much scope for relieving losses incurred in relation to a property rental business. The losses can only be carried forward and set against profits of the same property rental business (unless the loss arises in relation to certain capital allowances – see below).
Example 3 – Losses and profits
Richard has a property rental business. He makes a loss of £20,000 in the year to 5 April 2011, a profit of £3,000 in the year to 5 April 2012 and a profit of £32,000 in the year to 5 April 2013.
The loss of £20,000 in the year to 5 April 2011 is carried forwarded. £3,000 of the loss is set against the profit of £3,000 for the year to 5 April 2012, reducing the profit to nil. The balance of the loss of £17,000 is carried forward and offset against the profits of £32,000 for the year to 5 April 2013, reducing the taxable profit for that year to £15,000.
Sideways relief for certain capital allowances
The general rule is that a taxpayer cannot claim a property rental loss against general income. The loss must be carried forward and set against the profits from the same rental business. However, there is an exception to this rule where the taxpayer has made a loss in his rental business and rental capital allowance are due. The loss that is attributable to capital allowances can be set against general income for the tax year in which the rental business loss was made or the following year.
Overseas property rental business
Let overseas properties form a separate rental business to let UK properties. Thus a person who lets properties (which do not qualify as furnished holiday lettings) both in the UK and overseas has two property rental business – one for the UK properties and one for the overseas properties. Each business is considered separately and the losses from one cannot be set against the profits from the other. The rules regarding relief for losses of an overseas property business mirror those for a UK property business.
Furnished holiday lettings
Special rules apply to furnished holiday lettings and properties which qualify as furnished holiday lettings are treated as part of a furnished holiday lettings business, which is separate from any other rental business. As with other let property, furnished holiday lettings in the UK form a separate business to furnished holiday lettings in the EEA.
Prior to April 2011, furnished holiday lettings were treated as a trade for loss relief purposes and enjoyed the more generous relieving provisions available for trade losses. However, this is no longer the case and although furnished holiday lettings continue to be treated as a trade for some purposes, they are no longer treated as a trade for loss relief purposes.
Since 6 April 2011, losses in respect of a furnished holiday lettings business can only be carried forward and set against profits of the same furnished holiday business. The losses cannot be relieved against the profits of a non-furnished holiday lettings property business nor against the profits of an EEA furnished holiday letting business.
Furnished holiday lettings in the EEA form a separate EEA furnished holiday lettings businesses. Any losses from such a business must be carried forward and set against profits of the same business.
The furnished holiday lettings rules only apply to properties in the UK and the EEA. Any properties let as holiday lettings elsewhere in the world are treated as forming part of an overseas property business.
Establishing the loss
Where a loss is made in respect of a property rental business or a furnished holiday lettings business it is important to register the losses with HMRC by completing the income from property or overseas income, as appropriate, pages of the tax return.
Practical Tip :
Don’t forget to register rental losses so that these can be carried forward and set against profits from the same business.
Sarah Bradford
