In year one, I earned income from a house sale, but made a loss from a house sale in year two. Can I offset the loss incurred in year two against income earned in year one, or alternatively any income that is earned in year three?
It is possible to carry losses forwards and not backwards in different tax years. This means that if there has been any tax due when the profit was made from the first house sale, then tax will still
need to be paid. The losses that have been incurred on the sale of the second property should be registered with the Inland Revenue and can be offset against any future profits.
However if the sale of the first property was on or after 6th April in one year and the sale of the second property was on or before the 5th April in the following year then you can offset the losses from the second sale against that of the first sale as they both fall in the same financial tax year.
Consider the following two case studies:
Case Study 1: Alex Sells Property A on 10th April 2005 and makes a £40,000 pre-tax profit. He also sells Property B on 5th April 2006 for a £40,000 loss. The 2005-2006 tax year runs from 6th April 2005 to 5th April 2006. This means because both properties have disposed within the same 2005-2006 tax year Alex can offset the losses against from Property B against the gains from Property A and therefore incurs no tax liability.
Case Study 2: Alex Sells Property A on 10th April 2005 and makes a £40,000 pre-tax profit. He also sells Property B on 10th April 2006 for a £40,000 loss. The first property has been sold in the 2005-2006 tax year, but the second property has been sold in the 2006-2007 tax year, as it is after 5th April 2006.
This means that he cannot offset the losses from property B against the profit from property A. Therefore if Alex is a 40% tax payer then he will be liable to pay tax of £16,000 on the £40,000 profit.