One of the questions often asked by landlords is: what would happen if they have sold the last property held on their buy-to-let property business? Are the accumulated losses lost forever?
The answer is – it depends. In the case where the business is treated as continuing, losses can be set against income derived from letting after the dormant period.
When can it be construed that the business is continuing?
The property rental business ceases when the last let property is either:
- disposed of or
- used for some other purposes.
As the income from all properties is considered as one property rental business, any one disposal of the property out of a portfolio of properties does not make the business ceased. Sometimes if the rental activities do stop and restart, it is necessary to consider whether the original business continued after a dormant period. In the absence of this, the original business may presume to be ceased and a new business will commence when the rental activities start again. Again, it is a question of fact, and will depend on various factors such as:
- the length of time between lettings
- whether the activities of the rental business are the same before and after the dormant period
- whether the same property is let before and after the break in letting.
- where the business consists of the letting of one house, the business will not normally cease if one tenant leaves and there is a break before a new tenant is found, particularly if the property remains available for letting throughout
- a property business is not normally treated as having ceased if the property is not let for a period to enable repairs or renovations to be undertaken
- the business may be regarded as ceasing and recommencing if the property is used as the taxpayer’s main residence between lets
- the activities after a given date are merely concerned with winding up the activity, perhaps before retirement; here the business has ceased, and the customer is getting rid of the business assets or changing their use
- the activities after a given date are a continuation of the business to facilitate the realisation of the assets; here the customer continues to carry on the business, perhaps in the hope of selling a going concern for a higher price.
Normally, HMRC applies a general rule of thumb by which it regards the old business as ceasing if:
- there is an interval of at least three years between lets
- different properties are let before and after the interval in the old and new activities.
HMRC does not normally challenge a gap of less than three years if the landlord was trying to continue the business. Otherwise the landlord would need to provide evidence business was continuing.
What can be done to preserve the property losses for temporary cessation?
If the landlords are considering starting property rental business soon, these accumulated losses should still be declared on the tax return and carried forward as normal.
How are the property losses relieved in general?
Generally, any rental business loss is automatically carried forward and set off against the same rental business profits of the following year as specified within s118/S119 of Income Tax Act 2007.
- Property businesses which are treated as separate by statute:
- a UK property business and an overseas property business are treated as separate property businesses
- a loss arising to a Furnished Holiday Letting (FHL) business may only be used against profits of the same FHL business
- a property business which is run in different legal capacity. For example, an individual has a property business on its own and, he has a separate property partnership business. These are treated as two separate businesses for loss relief.
However, there is an exception to the above rule for farmers. Where agricultural land is a part of the rental business losses, these losses may be set off against their general income. The agricultural part is the expenditure claimed in their business accounts on maintenance, repairs, insurance and management of the agricultural land. Interest payable is not an allowable agricultural expense for this purpose.
There is separate guidance for the corporation tax treatment of losses arising in a property business carried on by a company, which can be found at HMRC manual PIM4230.
The above loss relief only applies when the properties are let on commercial terms. Any property rented on uncommercial terms cannot generate losses and the claimable expenses are capped up to the rent received on that property.
HMRC manual PIM2500
Article from ACCA In Practice