Meg Saksida explains the mechanics of claims for rental property losses against general income.
Generally, if a rental property business ends the year with a loss, there are very limited options for relieving the loss.
Usually, the loss must be carried forward; relieving the loss in the same tax year as the loss is only available if there are loss making rentals in the same business.
Loss relief restrictions
This is because a ‘UK property business’ includes all the rentals that the landlord has in the UK, both residential and commercial, so if a commercial rental property in London is loss making, but a residential rental property in Bristol is making a profit, the London loss can be set off against the Bristol profit in the same tax year of the loss. There is an exception for this general loss relief available for furnished holiday lettings; a loss arising on a furnished holiday lettings business is only able to be offset against a profit on the same furnished holiday lettings business.
Any overseas rental income the landlord has is deemed to be a completely separate property business. Losses on an overseas property business cannot, therefore, be offset against profits in the UK and vice versa. However, losses of an overseas property business can, in the same way as the UK property business, be set off against profits in the overseas property business in the same tax year.
Losses are also unable to be offset against any other property business that the taxpayer carries on in a different capacity. For example, an individual may personally have a residential property let out but may also be a part of a partnership which lets out property. If there is a loss on the individual’s personal property business, this cannot be offset against profits made on the partnership property business.
Offsetting against future profits
The next option if there are no profits in the same property business with which to offset the loss, or if the loss exceeds any profit on other lets, is to carry the losses forward to set them off against rental profits in the same property business in the following and subsequent years.
There is generally no limit on how long the loss can keep being offset in the future, so it can be carried forward indefinitely, or at least until the property business ceases.
If the rental property business ceases and after a time a new rental property business starts, the loss cannot be carried from the old business to the new one.
The process to obtain the loss relief is simply to deduct the loss from the rental profits of the future year. No special claim is required.
Offsetting against general income
Ideally, however, the landlord will wish to offset the loss as soon as possible. Happily, there are two situations where losses can be offset in the year of the loss against general income. These are where there is either a capital allowances connection or a relevant agricultural connection.
(a) Capital allowance connection
Where the business can offset capital allowances, and as a result of these capital allowances a loss arises, this loss can be offset against general income in the year of the loss.
Capital allowances are generally not available on a residential property business, but if the property being let is a block of flats, since the structure itself is not residential, claims can be made for centralised plant and machinery such as lifts and heating systems. Commercial property is also eligible for capital allowances.
(b) Agricultural expenses
Where the business has relevant agricultural expenses and the property business in which these were offset generates a loss in the year, this loss can be offset against general income.
The kind of expenses referred to are where the taxpayer has agricultural land forming part of the rental business and incurs costs for maintenance, repairs, insurance and management of the agricultural land. Agricultural land is land, houses or other buildings in the UK that are being used wholly or mainly for husbandry. These expenses would not include uncommercial agricultural expenses (for example) if the land is not being let in an arm’s length transaction. This would be evident in a let to friends or family where the rent was either not up to the value of a commercial lease or a nominal rent.
Interest is specifically excluded as an agricultural expense, as are other expenses which would not fit into the maintenance, repairs insurance or management of the land categories, such as rent and rates.
The loss does not have to specifically arise from the agricultural part of the rental business. It could arise from any part of the property business as long as the property business has the agricultural land and associated expenses in it.
The Devil in the detail
The rules are that the loss is able to be set against general income in the year of the loss and the following year. Property losses are not able to be carried back to the previous year like trade losses. This is an all or nothing ‘cliff edge’ relief. Either all the loss generated must be offset against the general income, or none of it. For example, a taxpayer may not offset only enough to preserve the personal allowance and carry forward the rest. If the taxpayer did not have enough general income to cover the loss in the year, they may be better advised to carry the loss associated with the capital allowances or agricultural expenses forward to the following year rather than lose some of it by offsetting it against a lower general income.
The loss relief is restricted to the lower of either the loss to be relieved or the general income. This means that no more than the loss available can be relieved and the general income cannot be converted into a loss, so no more than the general income available can be relieved. If there is excess loss available to be relieved, this can be carried forward to the next year to be offset against general income or to subsequent future years to be offset against property income of the same property business. In situations where a loss has arisen this year to be offset against general income and there is a remaining loss still waiting to be offset from the previous year’s loss, the previous year’s loss has priority.
The claim to use general income for loss relief is only available if the loss has been calculated on the ‘accruals basis’ rather than the simplified ‘cash basis’.
Claim required
A formal claim will need to be made to offset the loss against general income. This claim needs to be made before one year after the 31 January following the year of the loss.
For example, if the loss arises in the tax year 2021/22, the claim to offset the loss will need to be made by 31 January 2024. If all the loss is unable to be relieved in the year of the loss, a separate claim will need to be made to carry the loss forward to general income of the following year.
Limit on amount of claim
There is a limit on the amount of a claim that can be made against general income in one tax year.
The limit is the higher of £50,000 or 25% of the individual’s adjusted total income for the tax year of the loss. Any remaining loss unable to be relieved can be carried forward.
Practical tip
Where the level of agricultural expenses or capital allowance can be controlled, staggering them so that they are no more than £50,000 or 25% of the individual’s adjusted total income would be the best strategy to ensure deductibility in the same year.
