ACCA: Relief for UK property rental businesses post-Covid

While structuring a property business in the post-Covid era should always be driven by commercial considerations – such as approach to risk and operational capacity – tax considerations should be included when considering ways to diversify and future-proof property businesses on their way to a post-Covid recovery.

Individuals have only modest ways to relieve property losses, although as landlords adapt to the post-Covid market, it may still be possible to achieve profitability whilst reducing the tax bill.

Property loss relief is restricted

Individuals running a property business are likely to follow the simplified cash basis for tax purposes. Where the overall result is a loss, for the purposes of calculating the tax liability for the year, the property income figure in the tax return is nil. Losses are reported separately.

In instances where accruals basis may result in higher losses available for relief than when following the simplified cash basis, it may possible to elect for the accruals basis to be adopted.

How to change

You cannot offset property losses against an individual’s other income in the tax year or capital gains (different rules apply to some post cessation property losses – see ‘How to relieve post-cessation property business expenses‘).

Where property income arises to an individual in a separate capacity, it will not be available to relieve property losses generated within a separate property business. For example, UK property business losses arising in a partnership cannot be offset against UK property business profits arising to the partner as an individual.

Unlike normal trades, there are no extended rules to relieve losses incurred in the first years of a property business.

Availability of FHL profits for buy-to-let loss relief

Property losses can be offset against:

• property business profits of the same or future years
• current year UK property losses against profits from a UK FHL (furnished holiday lettings) business arising in the same tax year (see: UKPN7 and UKPN16 of the UK property notes.)
• brought forward UK property losses against  profits of a UK FHL business (see: UKPN17 of the UK property notes (2013/14 version). Although references have been removed from the notes for more recent years, the law has not changed, therefore this is thought to be HMRC’s current view. The relief does not work the other way round – you cannot offset UK FHL losses against UK property profits

Practitioners acting for clients with significant property portfolios may draw their attention to the benefits of the FHL business model for sustainable post-Covid recovery which allows for additional tax efficient treatment of property losses incurred until this point.

FHL and use of capital allowances

Any evaluation should take into account availability of losses arising due on capital allowances claims. Per CAA 2001, s215 (in conjunction with CAA  2001, s35), where the loss relates to excess capital allowances, the loss relief available is the lesser of:

• the taxpayer’s total income for the year
• the amount of the property business loss made in the year, and
• the net capital allowances, after setting off any balancing charges.

Anti-avoidance provisions target losses arising from excess AIA (annual investment allowance), where the main purpose (or one of the main purposes) is to produce a loss that can be set against total income, without a valid commercial reason.

Farm land and enhanced property loss relief

Normally general income is not available to offset property business losses, except in limited circumstances (for example, some post-cessation expenses). However, where a client has made a loss in their property business and that business included ‘agricultural estate’ (such as a tenanted farm), there is scope to make a claim to set part of the loss against total income (PIM4220). Allowable ‘agricultural expenses’ are maintenance costs, repairs, insurance and costs in managing the estate, but specifically exclude interest costs.

Where the loss relates to agricultural expenses, the loss relief available is the lesser of the:

• taxpayer’s total income for the year
• amount of the property business loss made in the year
• amount of the allowable agricultural expenses.

Anti-avoidance targeting transactions aimed solely or mainly to avoid tax and the unlimited income tax relief cap apply as usual.

How to claim

A claim must be made by the first anniversary of 31 January following the year specified in the claim. It is not possible to make a partial claim; the whole qualifying loss must be utilised and it is not possible to preserve a personal allowance.

To claim, include the loss to be set against total income in box 42 on page UKP2 of the UK property supplementary pages as well as on the white space of the page TR7 of the main tax return.