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 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.
Dorothy owns three properties – Lilac cottage, Rose cottage and Foxglove cottage.
In 2021/22 the rental income and associated expenses for the three properties are as follows:
|Cottage||Rental Income||Expenses||Profit/ (loss)|
|PROPERTY RENTAL BUSINESS||£31,000||£15,000||£16,000|
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.
The Same Property Business
Losses can only be set against the future profits of the same property business. If the landlord has more than one property business, for example a UK property business and an overseas property business, the losses from one cannot be set against the profits of another. Losses from a furnished holiday letting business can only be carried forward and set against profits of that business.
Losses Lost if Property Rental Business Ceases
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.
Derek has two properties which he 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.
Partner note: ITA 2007, ss. 117, 118, 119. CTA 2010 s37