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Offsetting guidance for UK private landlord clients
Post-cessation property expenses can be offset as follows:
- against post-cessation receipts
- some post-cessation expenses against total income and capital gains
- carried forward against future post-cessation receipts from the same property business.
Significance of cessation of a UK property business
The date of cessation of a property business is a question of fact. A property business may cease, for example, when the final UK property is sold, the owner moves into the property, or starts to use it for the purpose of a different business – for example, furnished holiday lets.
A break of less than three years in a property business will usually be considered temporary, therefore if a property business is restarted within three years of cessation of business activity, the same property business is assumed to continue.
The date of cessation has important implications for the purposes of relief of property losses and tax treatment of post-cessation receipts and expenses.
Tax point for post-cessation receipts and expenses
In cases where accruals basis is followed, most receipts and expenses relating to the last period of property business will have normally been accounted for. Yet some post-cessation expenses or receipts may still arise. One common example relates to receipts and payments in connection with recovery of old debts which had been previously been written off.
Where cash basis is followed by a private property landlord, post-cessation expenses and receipts are more likely to occur. In this case, both post-cessation income and expenses are taxable/tax deductible if they would have been allowable under the simplified cash basis (wholly and exclusively).
Post-cessation receipts are not reported on the UK property supplementary pages. Instead, the reporting depends on the tax year in which the income is taxed:
- income is assessed and taxed in the tax return of the year of receipt following normal cash basis rules, reported in box 17 on page TR3 of the Main Tax Return, with a description of the income in either box 21 or the white space on page TR7; or
- election can be made to carry back post-cessation receipts to the year of cessation.
Election to carry back post-cessation receipts
When to make an election
Making an election to carry back the post-cessation receipts may be beneficial if
- your client has unutilised losses from the property business in the year of cessation
- the trader’s marginal rate of taxation in the year of receipt is higher than in the year of cessation.
Election can be made for receipts received in the six years after the date of cessation to be taxed in the tax year of cessation rather than the year of receipt, per ITTOIA 2005 section 257. This applies even if the profit or loss in the tax year of cessation was calculated under the simplified cash basis.
How to claim
The claim must be made by the first anniversary of 31 January following the end of the tax year in which the income was received (eg 31 January 2021 for income received in 2018/19). Election is valid for the year for which it is claimed only.
The tax return for the earlier year is not amended. Instead additional tax is calculated using the tax rates and allowances for the year of cessation and added to the tax due in the year of receipt. Due to the election, the income is not treated as tax assessed in the year of receipt, and it is not taken into account when calculating the payments on account due for the following tax year.
- Box 14 on page Ai1 of the Additional Information supplementary pages to the Tax Return – enter the amount of income to be carried back to the year of cessation
- Box 15 – enter the year of cessation
- White space on page Ai4 – add reference to the formal election being made
- Box 14 on page TC2 of the Tax Calculation Summary supplementary pages – enter calculated tax due in relation to the earlier year
- The earlier year tax calculation can be submitted with the Tax Return or the relevant information can be included in the white space on page TC2.
Points to remember
Post-cessation receipts cannot be set against the property allowance. This is the case whether the receipt is taxed in the year of receipt or carried back to the year of cessation (ITTOIA 2005, ss 349–356).
Order of relief of post-cessation property expenses
All post-cessation property expenses can be offset:
- against post-cessation receipts arising from the same property business in the same year (receipts have not been subject to carry back election) or
- carried forward to be set against future post-cessation receipts from the same property business (for example if the property business is restarted within three years).
- In addition, certain categories of post-cessation expenses can also be relieved in the following order:
- excess of post-cessation expenses over post-cessation receipts – against total income for the tax year in which they were incurred ITA 2007, s125
- further excess of post-cessation expenses after a claim against total income (whether claim is made or not due to NIL total income) against capital gains in the same tax year in which the expenses were incurred (such a claim cannot create or augment a capital loss available for carry forward)
- any further excess of post-cessation expenses after relief against capital gains, carried forward to be set against future post-cessation receipts from the same property business (for example if the property business is restarted within three years).
Categories of expenses referred to above are:
- remedying defective work done in the course of the former UK property business
- damages in respect of any such defective work
- legal or other professional services in connection with any claim that the work done was defective
- expenses incurred in insuring against any liabilities arising out of any such claim
- debt collection expenses ― these can be deducted as can any bad debts which were not accounted for in the year of cessation
- writing off a bad debt which was originally charged to income tax (although not strictly an expense, the legislation treats it as such).
How to make a claim against total income
To make a claim against total income, enter the amount to be set-off in box 6 at the bottom of page Ai2 of the Additional Information supplementary pages and add a formal written claim for relief in the white space on page Ai4.
How to make a claim against capital gains
- To make a claim, enter the amount to be set-off in box 46 on page CG3 of the Capital Gains Summary supplementary pages to the Tax Return and add a formal written claim for relief in the white space on page Ai4 of the Additional Information supplementary pages.
- The claim must be made by the first anniversary of 31 January following the end of the tax year in which the expenses are incurred (eg 31 January 2021 for expenses incurred in 2018/19).
Anti-avoidance and other restrictions
Anti-avoidance targets the additional tax reliefs: against total income and capital gains, where transactions are entered into solely or mainly to avoid tax, rather than being the effect of genuine commercial circumstances.
The tax relief cap (greater of £50k of relief or 25% of income) restricts the relief of post-cessation expenses against total income.
The cap does not apply to the relief of post-cessation expenses against post-cessation property receipts and capital gains.