Tax rules for rental business losses
As a landlord you’re usually responsible for maintenance of the properties you let. If you make repairs which result in expenses exceeding rents, it counts as a loss for tax purposes. Losses you make on one UK property reduce profits on others for the same year, and if there are losses left they are carried forward to set against profits of later years. If you only let one property and it makes a loss, it’s automatically carried forward. However, there are exceptions to these rules.
The most well known exception to the normal loss rules is that for rental businesses which are furnished holiday lets. Profits and losses for these must be kept separate from those relating to other rental properties. Far less well known is the potentially more advantageous rule for losses which result mainly from non-residential property lets, this is often overlooked.
Tip: If losses result from capital allowances (CAs) or general expenses relating to letting agricultural property, you can use them to reduce your tax bill on your general income, e.g. tax paid on salary or dividends.
Capital allowance related losses
Where CAs – HMRC’s system for allowing tax deductions for capital expenditure, e.g. equipment, fixtures and fittings – result in an overall loss from letting property, you can set the loss against your other tax liabilities for the same year or the following one.
Example: Phil rents out three properties: a residential flat, a workshop and grazing land let under an agricultural tenancy. In 2017/18 the flat made a profit of £3,000, the workshop a profit of £1,000 less CAs of £6,500 for the cost of a new electrical system, and the land made a loss of £1,250. The losses and profits must be aggregated which produces an overall loss of £3,750 (£3,000 + £1,000 – £6,500 + £1,250). Phil’s other income is a salary and dividends from his company, which operates from the workshop and pays him rent. Phil was a basic rate taxpayer in 2017/18, but expects to pay higher rate tax in 2018/19. He therefore claims loss relief of £3,750 for the later year. This will reduce his tax bill by £1,500 (£3,750 x 40%).
Carried forward losses
You might save more tax by carrying forward a loss instead of using it to reduce tax on your other income. It depends on how much non-rental income you have in the year you make the loss and how much rental plus other income you’ll have in future years. You’ll need to sit down and crunch the numbers, or get your accountant to do it.
Tip: When deciding how to use a loss in the most tax-efficient way, keep in mind that you can defer your claim for quite a while, which makes the job easier as you’ll have a better idea of your overall income and tax position. You have until 31 January in the next but one tax year in which the loss occurred to make a claim, e.g. for 2017/18 you have until 31 January 2020.