Meg Saksida outlines ways for individual landlords to offset rental losses for tax purposes.
According to resolutionfoundation.org, one in eight private sector tenants has failed to cover their housing costs during the Covid-19 crisis. This means that 13% of private landlords are facing the same expenses as every other year but without the income to cover them, meaning they are more than likely finding themselves in a loss-making position.
Despite the government offering a myriad of generous support to many sectors of the population, unless the landlord is running a trading business (in which case they should be eligible to the self-employment income support scheme (SEISS)), they will not have received any grants in their capacity as a landlord. Even if the landlord’s rental investment business is held by a company and the landlord (as an employee) is furloughed by this company, the rules of the furlough system are that the employee cannot perform work for the company. This would make maintaining the properties impossible.
Where does that leave the loss-making landlord? In my article ‘Covid-19: Tax issues for landlords’ (Property Tax Insider, March 2021), I outlined the potential of using the cash basis for automatic tax relief, the possibility of not having to file a self-assessment tax return at all if the gross profits fall under £1,000, or having the tax collected through the PAYE code if gross income and profits are below certain levels. In this article, we turn to how to deal with the resultant losses and how they can be offset against other income or profits that the landlord might have.
Three businesses in one
Property businesses are taxed in rather a hybrid way in the UK. Profits are calculated as if they are a trading business, but then those profits calculated are taxed as investment income, so the normal reliefs for trading businesses, including those available to offset losses, are not available. UK landlords may consider that they have one ‘property business’, but this business is in fact further separated into three parts for tax purposes, as each part is treated differently.
UK property business
The UK property business is all UK properties that are let out without satisfying the requirements of a furnished holiday accommodation letting.
Overseas property business
If the landlord has property outside the UK that is being let out, this will fall into the overseas property business category.
Furnished holiday lettings
Furnished holiday lettings are those let properties in the UK and in the EEA that satisfy certain conditions; broadly that the property is furnished; it is available to be let for at least 210 days a year; and it is actually let for at least half of those with no one tenant staying for any more than 31 days.
So, although the taxpayer does indeed have one ‘property business’, if they have FHLs or property in both the UK and abroad, each category of the business is considered separately for the purposes of loss relief.
The first important point to note is that losses from one of the three businesses cannot be offset against profits in any of the other businesses. The only exception to this is that a loss on a UK property business can be offset against a profit on a UK FHL (but not vice versa).
Example 1: One landlord, three lettings businesses
Giorgia has a property rental business that includes one flat in Clapham, one house in Kilburn (both in London) and her old university apartment in Frascati just outside of Rome. In addition, she has a property on the Brighton seafront that satisfies the conditions to be a FHL.
In 2020/21, the tenant in the Clapham flat asked for a rental holiday between June and December, which Giorgia granted. Her apartment in Rome stood empty due to the pandemic from December 2020 to the end of the tax year. She had no guests for the whole tax year in her Brighton property. Her Kilburn house was let to a professional couple who continued to pay their rent.
In 2020/21 the profits and losses were as follows:
Property £
Clapham ( 7,000)
Kilburn 26,400
Rome (12,000)
Brighton ( 4,500)
If the losses could be set off against the gains, Giorgia would only have a profit of £2,900. However, due to the inability to offset the losses from the three different property businesses, only the Clapham loss can be offset against the Kilburn profit. This is because those two properties are both in the same (UK) property business. The other two losses are not.
If Giorgia had a profit on the Brighton property, the loss on Clapham could be offset against this.
Order of losses
Where losses are able to be offset, there is a strict order in which to offset them. This is set out in the tax legislation (i.e. the Income Tax Act 2007).
1. Offset the loss against the profits of the same ‘sub’ property business in the year
As seen above in the Example, the first offset available for her UK property losses is against profits in the same ‘sub’ property business. Giorgia was, therefore, able to offset the current year’s loss on the Clapham flat off against the current year’s profit on the Kilburn house.
2. Carry forward the losses to future profits
If there are no more current profits in the ‘sub’ business against which to offset the current loss (such as for the Rome and Brighton losses), the relief is then given by offsetting the loss against the net income of the individual in the following year. This income must have come from profits from the same property business.
The provisions detail a specific order for this offset; losses actually made next year in the same business will have a priority offset, and then following that, the losses will be carried forward on a FIFO (first in, first out) basis.
Example 2: Changed circumstances
The facts are as in Example 1. The vaccine rollout in the UK is successful, and Giorgia is able to successfully let the Brighton flat in 2021/22. Her Rome apartment is still, however, empty. She gets new tenants for Clapham.
In 2021/22 the profits and losses were as follows:
Property £
Clapham 16,800
Kilburn 26,400
Rome (12,000)
Brighton 30,000
As there are no losses carried forward in the UK property business (Clapham and Kilburn), the whole £43,200 will be taxable. For the overseas property business, Rome now has £24,000 losses to carry forward to future profits on the same business. For Brighton, the loss of £4,500 in 2020/21 will be carried forward and offset, such that there will only be £25,500 taxable in 2021/22.
3. Offset the loss against general income
If the property loss satisfies certain very restrictive conditions, the loss is not restricted to being offset against property income of the same ‘sub’ property business only but can be offset against the taxpayer’s general income.
This loss must have either a capital allowance connection or a relevant agricultural connection. In both cases, the loss must have occurred from using the ‘accruals’ basis of accounting. This kind of loss relief is restricted in that it is only available up to £50,000 or 25% of the taxpayer’s adjusted net income, whichever is the lower. If the loss has not been able to be offset in full, it can be carried forward for offset against future years’ profits.
Practical tip
If the pandemic has caused significant property losses to be carried forward, the more profitable properties one has in the same ‘sub’ business, the more losses can be offset. With the stamp duty land tax holiday having been extended to the end of June coupled with the recent record lower interest rates for borrowing, it may be a good opportunity to increase the property portfolio. However, rising property prices and the loss of the higher and additional interest rate offsets should be taken into consideration.
