Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

 

Tax relief for rental property losses post Covid


Newsletter issue - July 2022

Landlords could have been said to be the 'forgotten business' of the Covid pandemic - granted, they were able to take a three month 'holiday' from mortgage payments but were not given any direct help from the government (apart from business rate holidays and grants for Furnished Holiday Lets). Despite assistance via the furlough scheme for employees and the self-employment income support scheme for those running their businesses, some tenants fell into rent arrears such that many landlords are currently sitting on losses (although the tenant remains liable for the unpaid rent). How those losses are dealt with taxwise depends on the type of rental property and whether the landlord uses the 'cash basis' or the 'accruals basis' of calculation.

Profits and losses on property income are calculated in the same way as for a trading business but the letting is taxed as investment income such that the normal reliefs for trading businesses (including those available to offset losses) are not available. In addition, if a landlord has more than one type of 'property business', separate 'pools' are used for similar types of property i.e. furnished holiday lets, UK and overseas lets are kept separate.

As part of HMRC's 'Making Tax Digital' strategy where an individual landlord’s annual total turnover (gross rents) is less than £150,000, the default accounting method is now the cash basis. Companies and Limited Liability Partnerships are required to use the 'accrual' basis (i.e. recognising income received, and expenses paid on an invoice basis, regardless of whether or when the cash is received). However, an individual landlord can 'opt out' of the cash basis and use the 'accruals' basis by making an election on their tax return. In addition should the landlord have separate type of property businesses they can opt out of the cash basis for one property business and remain within for another. The 'opt out' election takes the landlord out of the cash basis for one tax year only and must be made for each subsequent year as required.

The calculation of profit or loss is undertaken at business level so providing automatic offset if one property makes a loss and another makes a profit. 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 business, there is a limited set off available for commercial properties. If there is an overall income tax loss on an individual's continuing commercial property portfolio over a tax year and that loss has been created by excess capital allowances claimed, then the loss can be relieved by being offset against the owner's other ('general') income for the same and/or next tax year. Otherwise the loss is automatically carried forward and set against future profits of the same UK property business.

This loss relief may be further restricted because it is only available up to £50,000 or 25% of the taxpayer's adjusted net income, whichever is the lower.

If a landlord's other income is less than the personal allowance, the accrual basis of calculation has been used (possibly because the rental income exceeds £150,000) and the loss has been incurred due to capital allowances, then rather than offsetting the total loss against general income in the year of loss, better tax planning would be to disclaim some or all of the capital allowances and carry forward the balance so as not to waste the personal allowance.

 

 

Request a callback from Mapperson Price

Our philosophy is to provide a professional friendly service to local people, including employed, self-employed and small to medium sized businesses. Fill in our callback form and we'll contact at a suitable time for you.

The partners are supported by staff with a range of experience in accounts, taxation, payroll, and company secretarial work to support the various services the firm offers.

REQUEST CALLBACK

We always aim to get it right first time, every time, we'll respond to you as soon as possible after your form has been received by us.

 


Newsletter Icon

Newsletter Sign up

Handy tax tips delivered directly to your email inbox