The financial side effects of coronavirus on your tenants may result in the costs of your rental business outweighing the rents you receive. What are your options for claiming tax relief for the losses?
Cash basis profits and losses
Since 5 April 2017 the normal method individuals and partnerships must use to work out taxable profits and losses of a property letting business is the “cash basis”. This means that to arrive at the profit or loss for a tax year you only take account of rents etc., received and expenses paid, rather than rent due and costs incurred, except where the income received exceeds £150,000 or you elect not to use the cash basis.
More than one property
If you let more than one property, residential or commercial, the profits and losses must be aggregated. Note that where you let properties in the UK and abroad you must keep the aggregate figures for the UK and overseas properties separately. Where there’s an overall loss for either UK or overseas properties, you’re entitled to tax relief. There are rules which specify how the relief is allowed.
Trap. Since 6 April 2020 deductions for interest and other finance costs cannot be deducted in working out profits and losses of a property rental business. Instead, a basic rate tax credit is allowed.
Loss relief
If your aggregate figures show a loss, usually the only way to obtain tax relief for it is to knock it off profits of the next tax year. Or, if there are no profits or the profits are less than the loss in that year, deduct them from the year after that, and so on until the losses are used. There are two exceptions to this rule; where all or part of the loss:
- results from capital allowances; and/or
- it relates to the letting of agricultural land.
- Sideways loss relief
To the extent that a loss relates to one of the exceptions above you can use it to reduce your tax bill for your other income for the:
- same tax year for which the loss occurs
- following year.
Example. Sean and Sara jointly own and let an apartment and the shop below. In 2020/21 the apartment produces a small profit while the shop creates a more significant loss. The aggregate result is a loss of £10,000. Because the properties are jointly owned Sean and Sara are entitled to loss relief of £5,000 each. Sean is a higher rate taxpayer for 2020/21 while Sara’s taxable income is only £12,000. She expects her income to be more than twice that much next tax year. They are each entitled to claim their share of the loss relief the way that suits them best, i.e. for greatest tax efficiency. Sean claims his relief against his tax payable on other income for 2020/21. Sara makes a similar claim but against her tax liability for 2021/22.
Tip. The deadline for submitting a claim for rental income losses against tax payable on other income is one year from 31 January following the end of the tax year to which the loss relates. For example, for a 2020/21 loss the claim must be received by HMRC no later than 31 January 2023. The deadline means that you have plenty of time to decide which year to claim the relief or whether or not to claim the loss against other income.
Unless the losses relate to capital allowances or the letting of agricultural land they will reduce the taxable profit of the rental business for later years. Where the losses result from capital allowances or agricultural letting you can use them to reduce your tax bill for the same or the year following that in which the loss occurred.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.