All is Not lost – Setting Losses on a Letting Business Off Against Other Income

All is Not lost – Setting Losses on a Letting Business Off Against Other Income
As a general principle, if your property letting business makes a loss for the year, all you can do is carry it forward against future profits from the same business. This contrasts with a trading loss, which can be relieved against your “general income” (salary, bank interest, company dividends, and so on) for the tax year. There are, however. three cases where a property letting loss can be set against general income:


• Furnished Holiday Accommodation

• Capital Allowances

• Agricultural Expenses

Furnished Holiday Accommodation (“FHA”)


This is deemed to be a trading activity for a number of purposes, including the set off of losses against general income. In order to qualify as FHA, the property has to:


• Be available for letting furnished to the public generally on a commercial basis for at least 140 days in the tax year.

• Actually let for at least 70 days.

• Not let to the same person for more than 31 consecutive days for more than 155 days per year.

This last condition sounds confusing, but basically the idea is that FHA is let on a short term basis during a period of at least 210 days per year – typically, during the holiday season, though the legislation does not specify the time of year – and provided at least 10 weeks have been let in this way, it is permissible for a longer let to fill up the rest of the year – typically, a so-called “winter let” – provided the lettings for more than 31 days do not occupy more than 155 days of the year.


If these conditions are fulfilled, then if a loss is made it can be relieved against general income for the year.


Capital Allowances


This relief is less generally known, and there is probably a number of landlords who are entitled to it but do not know they can claim it.
Capital allowances are available for expenditure on plant and machinery used in the letting business and with the new £50,000 Annual Investment Allowance it is likely that the small to medium sized property business will be entitled to 100% relief for its capital expenditure for the year.


The only snag is that capital allowances are not available on plant and machinery that is within a property let as “residential accommodation”, so landlords can only make the claim for plant that is in commercial properties, or that is used for the business but is not inside the accommodation – the obvious example is computer equipment, and perhaps the business proportion of a car.


Nevertheless, if your property business makes a loss, and part of that loss is made up of capital allowances, then you can claim that part of the loss against your general income for the year.


The claim is restricted to the smallest of:


• The capital allowances claimable
• The overall loss on the letting business
• Your general income for the year

If you are a 40% taxpayer, therefore, and your letting business is running at a loss, then if you spend say £1,000 on computer equipment (used wholly for the letting business), then you can claim a tax repayment of £400.


Agricultural Expenses

This is a more unusual claim, but one that can benefit a landowner. If you own land that is let and “managed as one estate”, then you may be able to make the claim. “Managed as one estate” is a slightly tricky definition but broadly speaking, if you own a farm and you let it, that will be “managed as one estate”.  If you are in this situation, and you are making a loss overall on your letting business, then you can claim your “agricultural expenses” against your general income. Once again, the claim is limited to the smallest of:


• The loss on the letting business.

• The amount of the “agricultural expenses”.

• The amount of your general income.

“Agricultural expenses” are defined as the costs of “maintenance, repairs, insurance and management” of the estate incurred by the landlord – note they do not include any interest paid on loans. The key thing is that the agricultural estate may itself be profitable – it is the overall position on the whole of the letting business that matters.


In all three of the above cases, the loss claimed can be set against the general income of either the same tax year, or that of the previous tax year.


James Bailey