How to use losses in a mixed property business

Tax rules for rental business losses

The general rule is that losses made from letting a UK property automatically reduce profits on others for the same year. If overall the proprietor make a loss from all property letting the loss is carried forward to set against aggregate property business profits of later years. There are exceptions to these rules which can be used to increase tax efficiency for loss relief.

Holiday homes

The normal loss rules don’t apply to properties which are furnished holiday lets (FHLs). Losses made from such property businesses can only be set against profits of the same business and so records of profits and losses for these must be kept separate from those relating to other property rental properties.

Other property rentals

Because profits and losses from UK property rentals (but not those from overseas properties) other than FHLs must only be aggregated if there’s an overall loss, it’s necessary to consider how relief is given. For property rental businesses it can only be carried forward and used to reduce future aggregate profits.

An exception to the rule above is that relief for losses can be claimed against tax paid on non-property business income where they result from either capital allowances (CAs) (HMRC’s system for allowing tax deductions for capital expenditure, e.g. equipment, fixtures and fittings) or the letting of agricultural property.

Loss relief

Where overall a loss results from CAs or agricultural letting, the individual can claim tax relief against tax on their other income of either the same year or the next.

Example. Javed owns and lets three commercial and one residential properties. In 2022/23 the residential and two of the commercial properties make profits totalling £15,000. The third commercial property makes a small loss of £700 and qualifies for CAs of £20,000. The loss of £700 is enhanced by the CAs making a total of £20,700. This must be aggregated with the £15,000 profits to produce an overall loss of £5,700. Of this, £700 does not relate to CAs (or agricultural lets) and so must be carried forward to set against future aggregate profits. However, Javed can claim relief for £15,000 against tax payable on his other income, e.g. his salary, for either 2022/23 or 2023/24.

When Javed is deciding how to use the loss relief in the most tax-efficient way, say because he may be liable to basic rate tax in one of the years but higher rate tax in the other, he should bear in mind that he can, within limits, defer making the claim until he’s sure which provides the best result. As the loss was for the 2020/21 tax year he has until 31 January 2023 in which to make his claim for relief against other income. He may decide not to claim this type of loss relief, known as sideways relief, at all. In that case he need take no action and the loss will roll forward automatically and be used to reduce his tax on future property rental business profit.