Small business and tax blog

What with mortgage interest, repairs and empty periods to deal with, most buy-to-let property investors sometimes make a rental loss on their property. They then want to know whether they can claim any sort of tax refund or tax relief on that loss. It sounds reasonable, but unfortunately the tax system is not very generous about rental losses.

If there is more than one rental property (other than a furnished holiday property or a property being let uncommercially - see below), each year the profit or loss on each one is added together, and the owner is taxed on the net total. So if there are a handful of properties, some of which make a profit and some of which make a loss, and the losses are less than the profits, then there will be full, immediate, automatic tax relief. If the rental losses are more than the rental profits, there will be some measure of immediate, automatic tax relief. Any surplus loss, or the loss from a single rental property, is dealt with as follows.

First of all, there is no automatic, general right to offset the loss against other income, such as from a job or a business. This is what would be most likely to generate an immediate tax rebate. We don’t know why this should be the case, as this option does exist for other losses such as self-employment losses, but that is what the tax law says.

If a person usually makes a profit from their rental property each year, and they are in employment, the tax on this profit may be collected each year through their PAYE tax code. In the year in which there is no profit there will probably be a refund of the over-deducted tax, but this is not the same as getting tax relief on the rental loss.

That is not to say that there is no tax relief at all on a rental loss. Any loss is carried forward to the next year in which there is a rental profit (from the same property, or a different one), and used to reduce that profit. If the rental property business never makes a profit before it ends, the tax relief would then be lost forever.

The key point here is that as long as the person owns at least one buy-to-let property which is being rented out, or there are only short gaps between properties, the rental loss can be carried forward indefinitely. This reduces the chance of never getting the tax relief. A period of say 3 years without any properties or rental activity would probably be enough for the tax office to argue that the rental business had closed, and any historical rental losses would disappear forever for tax purposes, even if another rental property was acquired in the future.

A rental loss may qualify for immediate tax relief against any other type of income if it qualifies as furnished holiday lettings. To qualify, the property must be:

• in the UK, and
• available for holiday letting to the public on a commercial basis for 140 days or more, and
• let commercially for 70 days or more, and
• let for periods of longer-term occupation (more than 31 consecutive days) for not more than 155 days during the year.

There are also a couple of exceptional other cases where a measure of immediate tax relief is available. These are where:

• the loss is due to certain agricultural expenses, or
• the loss arises from excess capital allowances.

All the above loss relief options only apply where the loss arises from ordinary letting on a full market rent. Losses on properties that are let on uncommercial terms (for example, at a low rent to a friend) can only be offset against future income from the same property.

For professional help with your property tax issues, please see our rental property tax page.