Losses on Property Lets

Newsletter issue - November 08.

In these turbulent times, losses on property lets may be increasing, so it's worth taking a look at how those losses are treated for tax purposes, to help get tax relief for any losses.

Where property is held in your own name
If you let a property you own personally, even it was previously your own home, you must report the rental income and expenses on your tax return. This applies whether you make a profit or loss from the letting.

Where you own several let properties all of the income and expenses relating to your UK properties are thrown into the same pot to establish the overall profit or loss for the year. Properties which are located outside of the UK are excluded from this property pot, as are properties which are let as furnished holiday homes on short lets. The profits and losses from overseas properties must be shown on the foreign income pages of your tax return. Furnished holiday lettings have special rules for dealing with losses and have some advantages.

It is important to declare the loss, if that is the result from the general property pot. Although you can't set that loss against your other income, it can be carried forward without time limit. If you do make a profit from letting your properties in a future year the loss you have made this year will reduce the tax you have to pay in that future period. If you don't claim the loss you won't be able to use it in the future.

Where property is held through a company
Where you hold let properties through a company the mechanism for calculating the profit or loss from the lettings is rather different. The interest paid on any borrowings taken by the company to fund the properties is not deducted directly from the rents, but it is treated as a separate expense.

The rental income from all the properties the company owns is set against the costs relating to those properties, excluding interest paid. Only at that stage is the interest payment set-off against all of the company's profits for the year. If those profits do not cover the whole of the interest paid, the excess interest cost is carried forward to the next year. The carried forward interest can only be set against the company's non-trading profits, such as from property or interest received. This means that it is not easy to get tax relief for excess interest where the borrowing relates to let property.