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HMRC internal manual

Property Income Manual

Beginning and end of a rental business: cessation


  • 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 etc also apply to rental businesses.

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 taxpayer 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 taxpayer 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 taxpayer 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 taxpayer 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 taxpayer bought another property for letting at the same time.

For a rental business to cease the taxpayer must end all activities giving rise to receipts from land and property. If, for example the taxpayer 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.

Rental business activities may stop and, after an interval, the taxpayer 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 taxpayer 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 thetaxpayer’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 taxpayer was trying to continue. But the taxpayer 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 (see below). But a cessation is particularly important where the old activity had unrelieved lossesbecause, as PIM4210 explains, losses can only be carried forwardand 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 below. 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.

Post-cessation receipts

A receipt which arises from a rental business after it has ceased is taxable under special rules provided, of course, the taxpayer has not already included that receipt in the computation of their rental business profits. The taxpayer may also be able to claim relief for post-cessation expenses for which they have had no relief, see below.

A taxpayer may get post cessation receipts where, for example, their rental business consisted of a single let property and, after they have sold the property and thus ceased their rental business, they receive an insurance pay out under a policy which covers atenant who defaults on the rents. The unpaid rent (or the insurance recovery) would have been taxable as business receipts while their rental business was continuing. Once the business has ceased the receipt can’t form part of their rental business. Instead it is taxed separately under:

  • Case VI of Schedule D for IT cases up to 2004-05 and CT cases.
  • ITTOIA05/S349 for IT cases for 2005-06 onwards.

Another common example of a taxable post-cessation receipt is the recovery of bad debts. These are taxable if the taxpayer previously claimed a deduction on the grounds that the debts were unlikely to be paid. They are obviously not taxable again if the debt was previously included as a receipt and no claim for bad or doubtful debt deduction was made.

Post-cessation expenses

In arriving at the tax due on post-cessation receipts the taxpayer can deduct any allowable business losses that were left unrelieved when the business ceased and also other expenses that would have been allowable had the business continued. Thus, for example, if the taxpayer recovers a bad debt after cessation, they can deduct the costs incurred in collecting that debt. Another example might be the cost of background heating for empty premises to keep down condensation and so maintain the value of the property for later sale.

Post-cessation expenses but no post-cessation receipts

Where the taxpayer doesn’t have any post-cessation receipts they may still be able to claim relief sideways for post-cessation bad debts and certain specific defined post-cessation expenses. The sideways deduction is against other taxable income and capital gains of the year in which the debts proved to be bad or the payments were made.

Post-cessation expenses - time limits

A claim to relief must be made 5 days less than 22 months from the end of the tax year in which the payment is made (that is by 31 January).

Cessation - additional commentary

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 BIM70500 onwards. Bear in mind, though, that there is a significant difference between a rental business and a trade in that a taxpayer, 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.

Guidelines on cessation

  • If there is evidence that the taxpayer 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 taxpayer 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 taxpayer 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.

However, if the taxpayer lets other properties in the same capacity, the rental business will be treated as continuing anyway and these questions will not arise.

Legislation on post-cessation receipts and expenditure - IT cases up to 2004-05and CT cases

ICTA88/S21B applies to Schedule A businesses the post-cessation receipts and expenditure rules for trades of ICTA88/S103 - S106, S108, S109A and S110. You can find guidance on the post-cessation receipts and expenditure legislation at BIM80500 onwards.

Reference is made above to post-cessation expenses when there are no post-cessation receipts to set them against. The sideways relief referred to is that provided by ICTA88/S109A. The types of expenditure are set out in subsection (2). Most of them are unlikely to arise in a rental business apart from (d) - the cost of collecting debts. The relief for bad debts is in subsection (4). See BIM80715 onwards for guidance on Section109A.

Legislation on post-cessation receipts and expenditure - IT cases for 2005-06 and2006-07

The scope of the legislation on post-cessation receipts and expenses is unchanged.

The legislation on post-cessation receipts is now in Chapter 10 of Part 3 of ITTOIA05 and the charging section is ITTOIA05/S349. In particular ITTOIA05/S351 applies the trading provisions:

  • ITTOIA05/S254 and ITTOIA05/S255 (allowable deductions),
  • ITTOIA05/S257 (election to carry back),

to rental businesses. See PIM1113.

Legislation on post-cessation receipts and expenditure - IT cases for 2007-08 onwards

The scope of the legislation on post-cessation receipts and expenses is unchanged. The legislation on post-cessation property relief is now in ITA07/S125.

A claim for post-cessation property relief is possible if a taxpayer ceases to carry on a UK property business and within 7 years makes a ‘qualifying payment’ or a ‘qualifying event’ occurs in relation to a debt of the business. These terms are defined in the following provisions which apply for the purposes of post-cessation property relief as they apply for the purposes of post-cessation trade relief:

  • ITA07/S97: meaning of ‘qualifying payment’,
  • ITA07/S98: meaning of ‘qualifying event’ etc,
  • ITA07/S99: reduction of relief for unpaid trade expenses, and
  • ITA07/S100: prohibition against double counting.

If there is insufficient income to absorb the amount claimed by way of post-cessation property relief, the taxpayer may be able to treat the unused part as an allowable loss for CGT purposes. See TCGA92/S261D and 261E.

Further guidance

For detailed guidance on the post-cessation receipts and expenditure legislation see BIM80500.