Friday 14th November 2008 Blog

Losses on Property Lets

 With interest rates fluctuating, the number of your clients making 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 them get tax relief for any losses

Where property is held in your clients name.

If your clients let a property they own personally, even it was previously their own home, they must report the rental income and expenses on their tax return. This applies whether they make a profit or loss from the letting.

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

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

Where property is held through a company.

Where your client holds 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.

Posted by: Bookcert Mentoring Team

Friday 14th November 2008

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