Jennifer Adams looks at tax relief for rental losses, and relief restrictions if those losses are as a result of a capital allowances claim.
For UK tax purposes, all sources of rental income are regarded as being derived from the same single property rental business, except for furnished holiday lets (FHLs) and overseas lets which are each regarded as separate property businesses.
The reason for the segregation is primarily the offset of losses. Essentially, losses made on the same type of property are automatically offset against profits made on other properties in the same portfolio for the same period (i.e. they are ‘pooled’ together). Thus, two distinct and separate ‘pools’ will be created should there be both UK property lettings and UK FHLs in a portfolio; any losses incurred are not permitted to be offset.
In addition, EU lettings and EU FHL are separate activities again creating two separate ‘pools’. Any overall loss incurred in the UK FHL business cannot be offset against any profit made on an EU FHL business and instead are generally carried forward against profits of the same ‘pool’. Lettings outside of the EEA do not qualify as FHL.
Capital items/capital allowances
Expenses of a capital nature cannot be offset against rental income. However, claims for capital allowances are still possible for specific types of let. They are generally not available to landlords for capital expenditure incurred in a residential let unless the property is let as FHL. The relevant legislation (CAA 2001, s 35) is clear - it expressly prevents landlords from claiming capital allowances for any capital item provided for use in a ‘dwelling-house’.
Claims are therefore most likely from commercial buildings or blocks of flats. Examples include plant such as a lift serving the whole of a block of flats - the block in itself is not let for use in a dwelling house and therefore qualifies. A central heating system serving a block of flats qualifies so far as it serves the common parts; central heating for the individual flats is permitted with apportionment of cost, although in practice HMRC do not insist on apportionment if the expenditure on the part serving the individual flats is less than 25% of the total expenditure.
Annual investment allowance
The most significant capital allowances claims will probably be on expenditure, which qualifies for the annual investment allowance (AIA). The AIA is a 100 per cent allowance for tools and equipment, capped at an annual amount. Until 31 December 2015, the AIA has a temporary limit of £500,000, returning to the original limit of £25,000 from 1 January 2016; expenditure in excess of this amount is subject to the normal writing down allowances of 18 per cent (or 8 per cent for a long-life asset that has a useful economic life of at least 25 years when new).
Excess capital allowances claim
If there is an overall income tax loss on an individual’s continuing UK property portfolio or an overseas property business over a tax year and that loss has been created by capital allowances claimed, a claim may be made (under ITA 2007, s 120) for the loss to be relieved by offset against the property owner’s other (‘general’) income for the same and/or following tax year. Any unutilised losses will be carried forward for offset against future profits of the same UK property business.
This ‘sideways’ loss offset is not available on either the UK or EU FHL businesses.
Should the amount of other (general) income be less than the personal allowance in any one tax year, it may be worthwhile to carry forward the loss, so as to ensure that it is not wasted, as the income will already be covered by the personal allowance. It should also be remembered that capital allowances can be disclaimed/restricted.
Impact of the Income tax relief ‘cap’
From 6 April 2013, any taxpayer seeking to obtain in excess of £50,000 of otherwise unlimited income tax reliefs in any one year will find their deductions ‘capped’ (ITA 2007, s 24A). The ‘cap’ is the greater of:
- 25% of their total income; or
- £50,000.
The cap applies to reliefs which are offset against an individuals’ total (termed ‘general’ in the legislation) income and not otherwise restricted. One of the main reliefs potentially affected is the above loss relief claim under ITA 2007, s 120, which may need to be restricted to whatever the ‘capped’ amount is calculated to be.
The loss in excess of the ‘capped’ amount will not be wasted, as it can be offset against the owner’s other ‘general’ income for the next tax year, with any ‘uncapped’ amount remaining being carried forward and set against future profits of the same property business. The impact will be a spread of tax relief rather than the relief being possible in one year.
Example – Impact
of loss ‘cap’
2013/14
Julie has ‘general’ income of £245,000; she
also has a property rental business that has created losses for which she is
entitled to relief under ITA 2007, s 120 of £80,000. The ‘cap’ on the loss
relief is £61,250 being 25% of £245,000, as this is greater than £50,000. She
claims this amount against her ‘general’ income in that year, leaving £18,750
of losses unrelieved and available for carry forward. As s120 property loss
relief permits claims in the same or next tax year, she is able to offset that
balance (subject to income levels and the 2014/15 losses ‘cap’) against her
2014/15 income.
2014/15
This year Julie’s total ‘general’ income is
£350,000 with losses of £60,000 from the property business. She makes a claim
for s 120 property loss relief against her 2014/15 ‘general’ income. Her losses
‘cap’ in 2014/15 is £87,500 (25% of £350,000). This amount is greater than
£50,000 and thus a claim for £60,000 loss relief can be made in full. There are
also the unrelieved losses brought forward of £18,750 to consider. The full
amount of the brought forward loss can be claimed, as the combined losses of
£78,750 are less than the 25% cap of £87,500 in that year.
FHL losses
Losses incurred on FHL activities can only be offset against future profits of the same trade, remembering to treat EEA and UK activities as separate businesses. There are no sideways relief provisions as apply to ‘real’ trades.
Practical Tip:
The current annual investment allowance of £500,000 until 31 December 2015 could be considered generous, but if losses created by claiming the allowance cannot be used, businesses may either choose not to invest in commercial property, or may stagger their investment so as to remain within the ‘cap’.
Jennifer Adams looks at tax relief for rental losses, and relief restrictions if those losses are as a result of a capital allowances claim.
For UK tax purposes, all sources of rental income are regarded as being derived from the same single property rental business, except for furnished holiday lets (FHLs) and overseas lets which are each regarded as separate property businesses.
The reason for the segregation is primarily the offset of losses. Essentially, losses made on the same type of property are automatically offset against profits made on other properties in the same portfolio for the same period (i.e. they are ‘pooled’ together). Thus, two distinct and separate ‘pools’ will be created should there be both UK property lettings and UK FHLs in a portfolio; any losses incurred are not permitted to be offset.
In addition, EU lettings and EU FHL are separate
... Shared from Tax Insider: Cutting Your Losses - Property Loss Relief Restrictions
