Can I offset rental losses against other income?
In short the answer is no, you cannot offset rental losses against other income to reduce your tax bill.
HMRC considers income from property as investment rather than trade so it’s not treated in the same way as a trading loss.
This means you’re not allowed to offset a rental loss against your tax bill from other sources of income (such as dividends or pension income) or any capital gains.
Losses from rental properties can be carried forward to set against future profits from your UK property business.
What is considered a rental loss?
Basically if you spend more on your properties than you take in rental income you have made a rental loss.
For example: In one tax year, you earned rental income of £10,000 and had allowable expenses of £12,000. You would have a rental loss of £2,000 in that tax year.
In general any loss incurred in a rental business will be automatically carried forward and offset against the profits of the rental business in the following tax year (as per HMRC manual ITA07/S118 and S119).
What can I do with a rental loss?
Landlords who have more than one property can offset losses on one property against another property’s income.
For example one flat is not making a profit, but another property is. You can reduce tax owed by offsetting the loss from the loss making flat against the income made from your other profit making property(s).
Can landlords carry forward a rental loss?
You can also offset a rental loss on the rental income you earn in the following tax year.
Losses carried forward do not expire and they continue being carried forward indefinitely until they can be used (or the rental business ceases trading).
With limited exceptions landlords rental losses can only be carried forward to offset against profits from the same property business.
If the current year’s rental profit isn’t sufficient to fully utilize all of the losses incurred in previous years any unused portion of these losses can continue to be carried forward into subsequent years until they can be applied for relief.
Similarly if there is also a loss in the current year it should be combined with any brought-forward loss and carried over to future years until relief is applicable (ITA07/S119).
How do I declare a rental loss?
It’s really important that your losses are included on your tax return to ensure you are as tax efficient as possible.
If you don’t declare a loss in the right way, you will miss out on valuable tax relief and could pay more income tax than you need to.
No special claim is necessary to carry forward a loss but if applicable you must subtract any losses brought forward from the previous year when calculating your rental business profit for the current tax year.
The tax relief achieved by using a rental loss is given automatically in the tax year against any profits in that year with any unused loss carried forward.
A brought forward rental loss automatically forms part of your tax calculation and is either used in full against the or carried forward again into the next tax year.
HMRC give you the options to carry forward a loss in your self assessment tax return.
Self assessment supplementary page SA105 forms part of the SA1 and is specifically for declaring property income.
The SA105 boxes that relate to losses include:
- Box 39: Loss brought forward used against this year’s profits.
- Box 41: Adjusted loss for the year.
- Box 42: Loss set off against that year’s total income.
- Box 43: Loss to carry forward to the following year including unused losses brought forward.
- Box 45: Unused residential property finance costs brought forward.
What about rental losses from properties outside the UK?
In the UK losses from property income can only be carried forward and used to offset against profits from property income within the UK.
It is not possible to use losses from overseas property income to offset against profits from UK property income, and vice versa.
Can landlord finance costs be carried forward?
Finance costs for landlords usually relate to financial products like buy to let mortgages, loans and overdrafts.
To qualify for income tax relief on finance costs individual landlords can claim a deduction at the basic rate of 20%.
This limitation also extends to discounts, premiums and loans taken out for purchasing allowable expenses related to your rental business.
If the tax reduction for the property business in a given year is limited to 20% of the profits any unused finance costs can be carried forward to the next tax year.
Self assessment supplementary page SA105 box 45 includes the figure for unused residential property finance costs brought forward.
What is considered rental income when you let property?
When you let property, any payments you receive from your tenants is considered rental income.
This includes: rent, non-returnable deposits, the remainder of any returnable deposit and any payments made to cover bills (such as council tax, water, energy).
How is the tax on rental income worked out?
You pay tax on your profits from rental income. Your profit is calculated by deducting allowable expenses or tax relief allowances from your rental income total; the amount left over is your profit and is taxable.