There may be times when a property is not producing any rental income. Typically this may happen when the property is first put up for rent, when there is a void period between the change of tenants or if a tenant defaults on the payment of rent.
Whether or not any rental income is being received as a landlord you will still be incurring expenses such as mortgage interest, maintenance and repairs, service charges and insurance costs.
Under current tax rules, all sources of income from land and property in the UK are generally regarded as deriving from the same single property rental business except for furnished holiday lettings and provided that the ownership is the same.
Overseas properties are treated separately and are not included in the UK property rental business. What this means is that if you have two rental properties and one is not producing any rental income, the rules effectively allow expenses incurred in relation to one property to be offset against income from another. The exception to this is if a property is let on an un-commercial basis. For example, if you let a property to your daughter for half the commercial rent, you would not be able to utilise any loss against profits from other properties and the loss would only be available against future profits from the same tenancy.
If so and one of those properties is empty but available to let, then you will be entitled to claim the service costs or repairs and maintenance costs you incur whilst the property is empty against your total rental income from all properties whilst a tenant is being sought. From 6th April 2020, all mortgage interest and other finance costs are treated separately and allowed against the total tax liability at 20% of the finance costs incurred. The gross finance costs used cannot be in excess of the relevant rental income less any excess personal allowance. Unused finance costs are carried forward to future years. There were transitional rules in that the 25%/50%/75% of the finance costs were restricted in 2017/18, 2018/19 and 2019/20 respectively.
As long as the expenses are incurred for the purposes of the property rental businesses, it does not matter that there is insufficient income from the property in question.
What this means is that if one property in a portfolio makes a loss, that loss is automatically relieved against any profits made by other properties in a portfolio.
Normally, if the rental business as a whole incurs a loss overall then the news is not so good. Under the property income rules, losses are usually carried forward for tax purposes and set against the first available profits from that same property business. If you cease letting properties the losses will be lost, even if you start letting again at a later date. There is no terminal loss relief under the property income rules.
If exceptionally, losses arise as a result of capital allowances claims for commercial property or certain agricultural expenses then the losses can be claimed against other income. Where a claim for capital allowances creates a loss the amount of the loss created by the capital allowances can be set off against a landlord’s other income. In some cases, this will result in a tax rebate.
With the special rules for mortgage interest introduced from 6th April 2017, the element which is not allowed in full (all of it from 2020/21) will not be added to the loss. Instead, the unrelieved finance costs will be carried forward and set off against future income. Unlike losses brought forward, the unrelieved finance costs are not used against any part of the income which is relieved by the personal allowance.
© Thandi Nicholls Ltd 2020 All Rights Reserved - The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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