Understanding relief for rental losses

With the tax season in full swing, this is the time of year we typically experience a surge in enquiries relating to rental income. Understanding relief for rental losses is useful. While the intention is to make a profit from letting out a property, this is not a given, and a landlord might instead realise a loss. Where this is the case, can the loss be utilised to save tax?

Calculating the rental loss

Any loss arising from the property rental business is calculated in the same way as profits. Under the cash basis, the loss for the period will be the cash received by the property rental business less the cash paid out. The cash basis is the default basis of preparation for unincorporated landlords with rental income of £150,000 or less.

Automatic set off against properties in the same property rental business

As profits and losses are calculated for the property rental business as a whole, if there is more than one property in the rental business, a loss on one property is automatically set against any profit from other rental properties in the same business.

Example

Dean owns three properties – Apartment A, Apartment B and Apartment C. In 2021/22 the rental income and associated expenses for the three properties are as follows:

ApartmentRental IncomeExpensesProfit/ (loss)
Apartment A£12,000£4,000£8,000
Apartment B£14,000£5,000£9,000
Apartment C£5,000£6,000(£1,000)
PROPERTY RENTAL BUSINESS£31,000£15,000£16,000
Example illustrating automatic set off against properties in the same property rental business

The profit for the property rental business as a whole is £16,000. The loss on Foxglove Cottage is automatically relieved against the profit on the other two cottages.

Utilising a loss

Where there is a loss for the property rental business as a whole, the general rule is that a loss on a property rental business can be carried forward and set against profits from the property rental business in the following year. If there is a loss in the next year or profits are not sufficient to fully utilise the loss, any unused part of the loss can be carried forward to the next year and so on until it can be used. There is no limit on the number of years for which the loss can be carried forward.

The loss cannot be used in other ways.

Can the loss be set against a different property business?

If the property rental business ceases before the losses have been used up, the losses are lost. This remains the case if the landlord starts a new property business after a gap as the new business will be a different property rental business.

Example

Lorna has two properties which she lets out. In 2020/21, the property rental business makes a loss of £20,000. The loss is carried forward. In 2021/22, the business makes a profit of £7,000, against which £7,000 of the loss from 2020/21 is set. The balance of the loss (£13,000) is carried forward to 2022/23. The loss can be carried forward and set against future profits from the same property rental business until utilised or the business ceases.

For further information on rental income or to discover how to gain greater visibility and insight for your business, get in touch. Simply call 0800 112 0880 or email hello@focalbusiness.co.uk – a growing business needs more from their accountant.

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