Many individuals take a long term view of their buy-to-let property, investing primarily for the long-term capital growth rather than an on-going income stream in the short-term. Indeed, where the buy-to-let property is financed predominantly by a mortgage, the investor may actually realise a loss once interest and expenses have been deducted from any rental income.
The problem with losses from a property rental business is that they can only be set against income from the same business. Thus, where a person has only one property, any losses made in relation to that property cannot be utilised until such a time as either that property turns a profit or the investor acquires other properties which make a profit.
However, all may not be lost.
If the investor also has a business that they operate from home, there may be a possible solution. If the investor operates his or her business through a trading company, renting the home office to the company will generate a rental income stream that can be set against the buy-to-let losses. This allows the losses to be utilised and also for money to be extracted from the company in a tax-efficient fashion.
However, when adopting this approach, some care needs to be taken. The rent charged by the company should be at a commercial rate for similar office space in the same location. If rents charged are excessive, then HMRC may raise questions.
From the company’s perspective, the rent is deductible and calculating its profits chargeable to corporation tax. From the individual’s perspective, the rent received represents income from the property rental business. Any expenses incurred `wholly and exclusively’ in relation to the let of the home office can be set against the rent received. This may include a proportion of mortgage interest, insurance, electricity etc. Normal rules as regards deductibility of expenses apply.
Also, to prevent any loss of main residence relief, it should be made clear in the rental agreement that the trading company does not have exclusive use of the home office space. Main residence relief is not compromised if the home office is used for both private and business purposes.
Phoebe runs a PR and marketing business from home through her company, XYZ Ltd. She works during school hours from a study in her home. In the evening, the room is used by her and her family.
Phoebe also has a buy-to-let property that she brought as an investment, which she rents out. In 2008—09, she made a loss on the buy-to-let property of £500. She also has losses brought forward of £1,340.
In the same year, she rented her home office to her company for £200 a month, generating rental income for the year of £1,200. Expenses attributable to the let of her home office for the year were £320. The overall position for her property rental business for 2008—09 is as follows:
Buy- to-let loss (500)
Rent re: home office £1,200
Less: expenses (320)
Profit on let of home office 880
Net profit of property rental business 380
Loss brought forward (1,340)
Loss carried forward (960)
Phoebe is able to set the loss from the buy-to-let income against the rental profit from the home office, and to utilise brought forward losses against the profit of the property rental business for the year.
As losses from a property rental business can only be set against profits from the same business, introducing a source of profit into the business allows losses to be utilised that may otherwise be wasted.