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HMRC internal manual

Property Income Manual

Beginning and end of a rental business: cessation

Summary

  • Usually a rental business ceases when the last let property is disposed of or starts to be used for some other purpose.

  • If letting ceases and later re-commences it is a question of fact whether there is a new business or a resumption of the old one.

  • The provisions for dealing with post-cessation receipts and expenses for trades also apply to rental businesses.

  • Under certain circumstance when the property business of a company ceases a claim can be made to set any losses against future investment profits. Further details are available in PIM4238.

Cessation of a rental business

Whether a rental business has ceased for tax purposes is a question of fact. The answer depends normally on whether the activities after a given date are:

  • merely concerned with winding up the activity, perhaps before retirement; here the business has ceased and the customer is getting rid of the business assets or changing their use, or

  • a continuation of the business to facilitate the realisation of the assets; here the customer continues to carry on the business, perhaps in the hope of selling a going concern for a higher price.

Where a rental business consists of letting property it will normally cease when the customer disposes of the last of the properties they are renting out or, alternatively, they begin to use all the properties for a non-business purpose. For example, if the business only consisted of letting a single house, it would cease when the tenant left and the customer began to use the house as a private residence or, alternatively, when they decided the house wouldn’t be re-let. But the rental business wouldn’t stop if the customer bought another property for letting at the same time.

For a rental business to cease the customer must end all activities giving rise to receipts from land and property. If, for example, the customer built up a rental business of fifty rented properties and later sold forty-nine of them, the rental business would continue until the last one was sold or the last one ceased to be used for rental business purposes.

Temporary pause or permanent cessation?

Rental business activities may stop and, after an interval, the customer may begin again. Here it is necessary to decide whether the original business really continued after a period of dormancy, or whether it permanently ceased and the new activities amount to a new rental business. This too is a question of fact and much will depend on things such as:

  • whether the same property is let before and after the period of dormancy, and, if so, whether the property has been substantially altered during the period of dormancy,

  • how long the interval between lettings lasts,

  • what type of activities constitutes the rental business before and after the period of dormancy.

For example, if the rental business consists of letting a single property, it will not normally cease just because the tenant quits and the property is empty while the customer is looking for a new tenant.

A general rule of thumb for rental businesses is that the old business stops where there is an interval of more than three years and different properties are let in the customer’s old and new activities. We offer this for guidance only. In practice, we will not normally suggest that the old business stopped where the gap is less than three years and the customer was trying to continue. But the customer would need to provide convincing evidence to show that the same business was carried on where the gap is three years or more.

Whether a rental business has ceased may not always matter because receipts or expenses arising after cessation may be taxed or relieved anyway under special rules (PIM3000). But a cessation is particularly important where the old activity had unrelieved losses because, as PIM4210 and PIM4236 explain, losses can only be carried forward and set against future profits of the same business. Therefore, where one rental business ceases and a new rental business starts at a later date, losses from the first business can’t be set against profits of the second.

There are special rules for receipts and expenditure after cessation, see PIM3000. The main point here is that post-cessation expenses can only be relieved for up to seven years after cessation, while there is no limit on carrying forward rental business deductions for a business that genuinely continues.

Identifying whether the business has ceased

When letting ceases for a period and later resumes, it is a question of fact whether the original business has resumed or there has been a cessation followed by a new business commencing. The question will be particularly relevant when there are losses to carry forward.

If the question is material, you should carefully consider all the evidence that the business continued. You can make some use of the principles applicable to trades, see BIM80565 onwards. Bear in mind, though, that there is a significant difference between a rental business and a trade in that a customer, acting in the same capacity, can only have one rental business. Therefore a change in the scale of activities which might have been treated as a change of trade would not constitute a cessation and re-commencement of a rental business.

The points below should be considered when determining whether a rental business has temporarily paused or permanently ceased. If the customer continues to let other properties in the same capacity, the rental business will be treated as continuing and these questions should not be considered.

  • If there is evidence that the customer has been trying unsuccessfully to get tenants during a period with no letting, you can normally accept that the rental business has not ceased.

  • You may also accept that the business has not ceased in cases where the property is temporarily unavailable while work on repairs or alterations are carried out.

  • If the let property is sold, and a new property is bought for letting, it may be possible to regard the same rental business as continuing. As a rule of thumb, the business should be treated as having ceased if there is a gap of more than 3 years between lettings and different properties are let before and after the gap.

  • The 3-year rule is only a rule of thumb and there may be other factors pointing to cessation even when the gap is less than 3 years. For example, the customer may sell the only let property, invest the proceeds in a different business venture for 18 months and then buy another property for letting. This would be a cessation. On the other hand the customer who had not ceased the rental business might reasonably invest the proceeds in a fairly liquid way while looking for another suitable property.

  • You should normally treat the business as ceasing if, after letting stops, the property is put to some other use, for example the landlord lives in it himself.

Further guidance

For detailed guidance on the post-cessation receipts and expenditure legislation see PIM3000 and BIM90000 onwards.