Potential tax relief for rental losses is an important consideration for most landlords at the moment.
The financial side effects of coronavirus on your tenants may result in the costs of your rental business outweighing the rents you receive.
So what are your options for claiming tax relief for rental 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 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.
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 for rental losses.
There are rules which specify how the relief is allowed.
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.
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
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
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.