Sarah Bradford explores the options for obtaining relief for losses on let property.
The property income rules recognise different types of property businesses. These are UK property businesses, overseas property businesses, UK furnished holiday businesses and EEA furnished holiday lettings businesses. Within these categories all property owned by the same person forms a single property business. This concept is important for understanding how profits are taxed and also how relief is given for losses.
Example 1: Multiple properties
David own six properties that he lets out – three unfurnished houses in Manchester, two flats in France and a holiday cottage in Cornwall that meets the definition of a furnished holiday let.
Dave has three property businesses:
The profits or losses are calculated for the property rental business as a whole rather than in relation to each property.
The concept of a single property business and the fact that profits or losses are computed for the business as a whole means that where a loss is made on a particular property, that loss is automatically relieved against profits made on other properties in the same property rental business.
Example 2: Profits and losses
For the year in question, Dave makes the following profits and losses in relation to his Manchester properties forming his UK property rental business:
Property A Profit £10,000
Property B Profit £2,000
Property C Loss (£5,000)
Property income (net) Profit £7,000
The loss on property C is automatically set against the profits on properties A and B to arrive at the overall profit for the UK property income business as a whole of £7,000.
Where a loss is made on a particular property, there is no need to make a claim of relief as it is automatically set against profits on other properties in the same business to arrive at the overall result.
Carry forward against future profits of same business
Where the business as a whole makes a loss, other than in the very limited circumstances described below, the general rule is that the loss is carried forward and set against profits of the same business in the following year. Where there are insufficient profits to fully relieve the loss in the following year, the loss is carried forward to the next year, and so on, until fully used up.
Example 3: Rental business losses
Dave made a loss of £9,000 in his UK property rental business for 2013/14. In 2014/15, he made a profit of £7,000 in the same business.
The £9,000 loss for 2013/14 is set against the profit of £7,000 for 2014/15, reducing the assessable amount to nil for that year. The unused portion of the loss of £2,000 (i.e. £9,000 - £7,000) is carried forward to set against the first available profits of the same business.
No set-off against another property business
Losses can only be carried forward and set off against future profits of the same property business. There is no facility to set losses from one type of business, such as a UK property business, against profits of another type of property business, such as an overseas property business, even where they are owned by the same person.
Example 4: UK and overseas property business
In 2014/15, Dave makes a loss of £4,000 in his overseas property business, and a profit of £7,000 in his UK property business.
The loss from the overseas property business cannot be set against the profit from the UK property business for the same year. Instead it must be carried forward for set off against future profits of the overseas property rental business.
The property rental business will normally cease when the last property is sold. Special rules apply to tax receipts and provide relief for expenses after cessation. Where the business has unrelieved losses at the date of cessation, these can be set against any post cessation receipts when working out the tax, if any, due on those receipts.
Care should be taken if there is a gap in the business, particularly if there are unrelieved losses. This is because losses can only be carried forward and relieved against profits of the same property business. This means that if one property business ceases and few years later a new rental business starts, the losses from the old business cannot be set against any profits from the new business, as the two business are not the same.
Losses on furnished holiday lettings
From a loss perspective, furnished holiday letting used to enjoy a more advantageous position as compared to other types of lettings. For 2010/11 and earlier tax years, furnished holiday lettings were treated like a trade for loss relief purposes and it was possible to set a loss arising in a furnished holiday letting business against general income of the current and previous year. It was also possible to carry back the loss in the first four years of the trade against income of the previous three tax years, Furnished holiday lettings also used to be able to benefit from the trade terminal loss relief provisions.
This is no longer the case and when it comes to losses, for 2011/12 and subsequent tax years, furnished holiday lettings no longer enjoy an advantageous position. Losses from a furnished holiday business, as with other losses, are generally carried forward and set against future profits of the same business.
Limited sideways relief
Although the general rule is that losses from a property rental business can only be relieved by carry forward and offset against future profits of the same property rental business, a very limited set-off is available for business rental losses for income tax purposes against general income to the extent that the loss is attributable to certain capital allowances, or certain agricultural expenses.
Where a taxpayer makes a loss in his or her UK or overseas property business and the loss has either a capital allowances connection or a relevant agricultural connection, an amount (known as the applicable amount of the loss) can be deducted in calculating a person’s net income for the tax year in which the loss was made or the following tax year.
A loss has a capital allowances connection if the amount of capital allowances treated as expenses exceeds the amount of charges under the Capital Allowances Act 2001 treated as receipts. The applicable amount of the loss is the amount of the loss or, if less, the amount arising from the relevant capital allowance connection and/or agricultural connection. A loss has an ‘agricultural connection’ if the business is carried out in relation to land that consists of or includes an agricultural estate and allowable agricultural losses are deducted in calculating the estate loss.
Cap on relief
It should be noted that a cap applies to limit income tax reliefs, with effect from 6 April 2013 onwards. The cap is set at the greater of £50,000 and 25 per cent of income. Various loss reliefs come within the scope of the cap, including property loss relief against general income.
Options for obtaining property loss reliefs are limited, and in the main can only be set against future profits of the same business. Expanding the business to include more profit making properties may provide scope to utilise losses carried forward.