Bills But No Rent

Bills But No Rent

The recession is hitting all sectors of the economy and the property rental sector is no exception. Although the difficulty in obtaining mortgage finance may force people into the rental sector who might otherwise buy, tenants may hit financial difficulties, as a result of job losses or otherwise, and consequently default on their rent.

Landlords may also experience empty periods when they are unable to let their properties.

Despite the lack of income, the landlord will incur expenses on the properties. A mortgage may need to be paid and expenses may be incurred on maintaining the property. What relief is available?

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.

Consider the situation of a landlord who lets 3 properties, each of which he purchased with a buy-to-to-let mortgage.

The landlord will still incur mortgage interest costs if a property stands empty while a tenant is sought. However, provided that the property is available for letting and a tenant is being sought, the landlord will remain entitled to a deduction for the mortgage interest. As profits or losses are considered for the portfolio as whole, the interest incurred in relation to the unlet property is set against total income from all properties. It does not matter that there is insufficient income from the property in question. This is true of all expenses, not just mortgage interest. It does not matter which properties that they relate to, only that they are incurred for the purposes of the property rental businesses.

This global approach also means that if one property in the portfolio makes a loss, that loss is automatically relieved against any profits made by other properties in the portfolio.

However, all  this is very well if the property rental business as a whole is in profit, but what happens if the business makes a loss overall?  Unfortunately here the news is not so good. Under the property income tax rules, losses are automatically carried forward and set against the first available profits from that same business. With the exception of unrelieved capital allowances, they cannot be used to reduce the landlord’s other income.

It is important to note that the losses can only be set against future profits of the same rental business. Thus if one business ceases and a new one is started, relief for the losses may be lost. Losses will also remain unrelieved if the landlord is forced to sell the properties. There is no terminal loss relief under the property income rules.

One the plus side, the single rental business automatically offsets losses from one property in the portfolio against profits from another property; however, if the business as a whole makes a loss, relief is deferred until it is once again in profit.

Sarah Bradford