The end of a property rentals business can be a tricky affair but with the right knowledge and preparation you can ensure that you benefit from all of the reliefs available - and without paying more tax than you need to!
Profits derived from the ownership of land and property in the UK is treated as arising from a single property rental business. This means that a consolidated approach is taken and the income and expenditure from all let properties is grouped together and tax assessed on any overall profit.
The profits from the rental business are computed using the same principles as for other trades with the crucial difference that the taxpayer is not treated as actually trading. This is an important distinction as it means that some of the reliefs that are available to traders are not available to those with a property rental business.
The consolidated approach also means that the property rental business does not cease until the last let property has been disposed of. Therefore it is not necessary to consider the cessation provision each time that a property ceases to be let, as long as at least one let property remains in the business.
This article examines some of the issues surrounding the cessation of a property rental business.
When Does the Rental Business Cease?
The property rental business ceases when the last let property is either disposed of or used for some other purposes. This is a question of fact. For example, if the property rental business comprised the letting of a single house, the property rental business would cease when the tenant left and the taxpayer began to use it as a main residence, or when the taxpayer decided that the property would not be re-let.
However, because income from all property is considered as one property rental business, the business would not cease if the taxpayer disposed of one property and at the same time bought another property to let.
The business continues until all activities giving rise to receipts from land and property have come to an end. Thus if property rental business comprised of letting 200 houses and all but one of those houses was sold and the remaining house continued to be let, the property rental business continues until such time as that last property ceases to be used for rental purposes.
In some cases it will not be clear whether or not the property rental business has ceased as the rental activities may stop and later restart. In this scenario it is necessary to consider whether the original business continued after a dormant period or whether the original business did in fact cease and a new business has commenced. Again this is a question of fact, and will depend on various factors such as:
• the length of time between lettings;
• whether the same property is let before and after the break in letting; and
• whether the activities of the rental business are the same before and after the dormant period.
For example, where the business consists of the letting of one house, the business will not normally cease if one tenant leaves and there is a break before a new tenant is found, particularly if the property remains available for letting throughout.
Similarly, a business is not normally treated as having ceased if the property is not let for a period to enable repairs or renovations to be undertaken.
However, the business may be regarded as ceasing and recommencing if the property is used as the taxpayer’s main residence between lets.
HMRC apply a general rule of thumb by which they regard the old business as ceasing if there is a gap of at least three years between lets and different properties are let before and after the interval.
If the gap is less than three years and the taxpayer was trying to continue the business, HMRC will not normally challenge this. However, if the gap is more than three years, the taxpayer would need to provide evidence that the business was continuing. This can be important where there are unrelieved losses at stake.
Application of Trading Basis Period Rules
The application of the trading income rules to property businesses means that the normal trading rules on closing year basis periods apply. The basis period for the year of cessation begins immediately after the basis period for the previous tax year and ends on the date of cessation.
The trading rules as they apply to post-cessation receipts and expenses also apply on the cessation of a property rental business.
A taxpayer may receive receipts in connection with the property rental business after the business has ceased. This may take the form of, say, an insurance payout or the recovery of a bad debt. As the business has ceased the receipt cannot form part of the income of the property rental business; instead it is taxed separately as a post-cessation receipt.
In the same way that post cessation receipts are taxed, relief may be given for expenses incurred after the date of cessation in connection with the property rental business. For example, where a taxpayer recovers unpaid rent from a tenant, he may incur expenses in relation to the recovery.
Where the taxpayer also has post-cessation receipts, relief is given by offsetting the expenses against the receipts. However, if there are no receipts, relief may still be available for post-cessation bad debts and certain specified expenses (broadly those expenses incurred in relation to remedy defective work of paying associated damages).
Relief is given sideways against other income and capital gains of the same year and must be claimed by 31 January but one from the end of the tax year in which the payment was made.
Losses from a property rental business can only be set against future profits from that business. Thus where the business has unrelieved losses and letting resumes after a break, the issue of whether the existing business has continued or the old business ceased and a new business started is critical in determining whether relief is available for those losses.
In the case where the business is treated as continuing, losses can be set against income derived from letting after the dormant period. However, if the business is treated as having ceased, the benefit of those losses is lost as they cannot be set against any profits from the new letting business.
In the main the rules on the cessation of a property rental business mirror those for the cessation of a business generally. However, special care needs to be taken if there are unrelieved losses, particularly if there is a possibility of letting income arising at some future date, to ensure that relief for those losses is preserved wherever possible.
This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.
By Sarah Bradford