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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Losses: set against general income (IT)

Summary

  • IT rental business losses can be set against general income only to the extent that they are attributable to:

    • certain capital allowances,
    • certain agricultural expenses,
    • furnished holiday letting losses (the last year this set off available is 2010-2011 -see the separate guidance at PIM4130).
  • The amount of the loss attributable to these items can be set against the general income of the year of loss or the following year.
  • A claim has to be made by the 31 January just under 22 months from the end of the year of assessment.

Legislation

For 1995-96 to 2004-05 the rules for IT Schedule A losses are in ICTA88/S379A. Relief against general income is given under subsection (3). Subsection (2) determines the circumstances in which the relief is available, that is when there is a loss and either net capital allowances, allowable agricultural expenses or both.

For 2005-06 and 2006-07 ICTA88/S379A continues to apply but references to Schedule A losses are replaced by references to losses from a UK property business.

For 2007-08 onwards the IT property loss provisions are at ITA07/S117 onwards. In particular ITA07/S120 to S124 provide for property loss relief against general income.

Years of set-off

The years against which a property loss may be set off are not the same as for a trade loss. Trade losses may be set against the income of the same year or the year before. Under ICTA88/S379A and ITA07/S120, however, the claim for property loss relief is against the income of the same year or the following year.

Losses against other income: capital allowances

The general rule is that a taxpayer can’t set rental business losses against the rest of their income. But they may be able to do so where they have made a loss in their rental business in a tax year and rental business capital allowances are due. In this case they may make a claim to have some or all of the capital allowances part of the loss set against their general income.

Special rules apply to furnished holiday lettings where capital allowances are included in loss relief claims: see PIM4130.

A taxpayer can set the capital allowances part of the loss against their general income of either:

  • the tax year in which the rental business loss was made, or
  • the tax year following that in which the rental business loss was made.

Thus, a loss for 2003-04 attributable to capital allowances can be set against either the taxpayer’s general income of 2003-04 or their general income of 2004-05.

The amount of loss relief available because of capital allowances is restricted to the smallest of the following three figures:

  • the taxpayer’s total general income for the year after deducting rental business losses brought forward (to the extent of the rental business income) and after deducting any sideways relief for the previous year’s loss (see above),
  • the amount of the rental business loss made in the year,
  • the net capital allowances after setting off any balancing charge.

Claims & time limits: sideways set off of capital allowances

The taxpayer must make a claim to obtain sideways relief for capital allowances against their total income.

Claims must be made within just under 22 months after the end of the tax year in which the relief is to be given (by 31 January). For example, suppose the relief is for 2003-04. Here the tax year ends on 5 April 2004 and claims must be made by 31 January 2006.

Losses against other income: agricultural expenses

Where the taxpayer has made a loss in their rental business in a year of assessment and agricultural land forms part of their rental business, they may make a claim to have the agricultural part of the loss set against their general income. The agricultural part is the expenditure claimed in their business accounts on maintenance, repairs, insurance and management of the agricultural land. Note that interest payable isn’t an agricultural expense.

The taxpayer can set the loss against their general income of either:

  • the tax year in which the rental business loss was made, or
  • the tax year following that in which the rental business loss was made.

Thus, a loss for 2004-05 attributable to agricultural land can be set against either their general income for 2004-05 or their general income of 2005-06.

The amount of loss relief available is restricted to the smallest of the following three figures:

  • the taxpayer’s total general income for the year after deducting rental business losses brought forward (to the extent of the rental business income) and after deducting any sideways relief for the previous year’s loss (see above),
  • the amount of the rental business loss made in the year,
  • the expenditure on repairs, maintenance, insurance or management of the agricultural land, (ICTA88/S379A (2)(b) and ITA07/S123).

The sideways relief does not include uncommercial agricultural expenses. The expenses must be deductible in computing the loss and uncommercial expenses will only be deductible up to the amount of the income from the agricultural property (PIM2220). Uncommercial losses arise where the terms of the letting are not based on those of the normal open market; for example, where the taxpayer agreed to charge a relative a nominal rent or a rent below the going rate for a similar kind of lease.

Claims & time limits for sideways set off of agricultural loss

A taxpayer must make a claim to obtain this sideways relief against their total income.

Claims must be made within just under 22 months after the end of the tax year in which the relief is to be given (by 31 January). For example, suppose the relief is for 2004-05. Here the tax year ends on 5 April 2005 and the claims must be made by 31 January 2007.

Agricultural expenses - more detail

For relief to be available in respect of agricultural expenses, all that is required is that there is a rental business loss and there are allowable agricultural expenses. The loss may not necessarily arise from the agricultural land, as it would not if the income from the agricultural land exceeded the expenses relating to that land. The loss would then have arisen from other parts of the rental business but relief would still be available.

Allowable agricultural expenses are defined by ICTA88/S379A (8) - (10) and ITA07/S123. The definition is in terms of the ‘maintenance, repairs, insurance or management’ of the agricultural estate.

‘Agricultural estate’ means land, including houses and other buildings which is managed as one estate, and which consists of or includes any agricultural land. ‘Agricultural land’ means land, houses or other buildings in the UK occupied wholly or mainly for the purposes of husbandry.

Expenses not included as agricultural expenses

Where the estate includes non-agricultural land, expenses on parts not used for husbandry should be excluded.

The expenses have to be those which are deductible in the rental business computation in respect of the maintenance, repairs, insurance and management of the estate. So an adjustment has to be made for non-deductible expenses.

Interest is specifically excluded. Also, some allowable rental business expenses do not come within the four headings of maintenance, repairs, insurance and management, and so cannot be relieved in this way. Examples would be rent or rates paid.

Example: sideways losses: capital allowances & agricultural expenses

Michael has substantial professional income. He also lets a number of properties including shops, factories and farms. All the properties are let on open market terms. The income and expenses of all the lettings are included in a single rental business.

During 2005-06 Michael incurs exceptional (but allowable) revenue expenditure in relation to his letting business which results in a rental business loss of £50,000.

The following items are included in arriving at the £50,000 loss:

Capital allowances £28,000
   
Balancing charge £26,000
Agricultural expenses £30,000

Rental business losses cannot normally be relieved sideways against non rental business income: they can only be carried forward to set against later rental business profit. Michael is, however, entitled to a net amount of capital allowances and to agricultural expenses. He can claim under ICTA88/S379A (3) to set these sideways, as a rental business loss, against general income of 2005-06 and (if that year’s income is insufficient to absorb them) general income of 2006-07.

If Michael has sufficient income he can therefore claim relief for 2005-06 for losses of £32,000. This is:

  • net capital allowances: £2,000 (capital allowances £28,000 less balancing charge £26,000), and
  • agricultural expenses £30,000.

The balance of the £50,000 loss (£18,000) is carried forward to set against future rental business profits, (ICTA88/S379A (3)(b)).

Example: restrictions on sideways relief: relievable income reduced by rental business loss brought forward

Brenda’s income for 2003-04 is:

Schedule A profit £ 1,000
   
Other £10,000
Total £11,000

At 6 April 2002 Brenda had rental business losses brought forward from 2001-02 under ICTA88/S379A (1) of £5,000. She makes a valid claim under ICTA88/S379A (3) to set a 2002-03 rental business loss of £12,000 attributable to capital allowances sideways against general income of 2003-04. Brenda could have chosen to set her capital allowances against her 2002-03 general income but did not do so.

ICTA88/S379A (6)(a) requires that the loss brought forward under ICTA88/S379A (1) first be set against the rental business profit before calculating relievable income (it was sustained before the ICTA88/S379A (3) claim loss).

The loss brought forward covers the £1,000 rental business profit for 2003-04 (the balance £4,000 is carried forward) and relievable income for that year is therefore £10,000.

The 2002-03 losses relieved against general income for 2003-04 are therefore restricted to £10,000 with the balance of £2,000 (together with the unrelieved losses of £4,000 brought forward from 2001-02) carried forward.

Example: restrictions on sideways relief: relievable income reduced by rental business loss brought forward and sideways

Oliver has rental business losses attributable to capital allowances eligible for sideways relief claims as follows:

2003-04 loss £20,000
   
2004-05 loss £15,000

Suppose Oliver’s total income for 2004-05 is £25,000. He makes sideways claims for relief for both years of loss against 2004-05 income, (ICTA88/S379A (3)).

To calculate the relievable income for 2004-05 for the 2004-05 loss, the 2003-04 loss (for which there is also a claim) must be deducted first from the total income of 2004-05. The effect of this is that the earlier loss is set off first, (ICTA88/S379A (6)(b)).

In Oliver’s case the 2004-05 relievable income for the 2003-04 loss is £25,000 and for the 2004-05 loss is £5,000. This is the 2004-05 income of £25,000 less the 2003-04 loss of £20,000. Oliver will get relief as follows:

2004-05 total income £25,000
   
Less 2003-04 loss £20,000
Balance of income left £ 5,000
Less 2004-05 loss £ 5,000
Taxable NIL

The set off order ensures that the balance of the 2004-05 loss of £10,000 (£15,000 less £5,000) can be taken forwards and also, if Oliver wishes, sideways against general income of the following year under ICTA88/S379A (3).

Example: restrictions on sideways relief: net capital allowances or agricultural expenses greater than rental business loss

Pamela’s rental business produces a loss for 2003-04 of £3,000. That loss includes:

  • capital allowances: £10,000.
  • balancing charge: £3,000.

Pamela’s relievable income for 2003-04 is £35,000. Pamela claims sideways relief against general income for 2003-04, (ICTA88/S379A (3)). Her net capital allowances are £7,000 (£10,000 less £3,000). Although the net capital allowances are smaller than her relievable income it is greater than her overall rental business loss of £3,000. Her relief is therefore limited to £3,000, (ICTA88/S379A (4)).

The same restriction would have applied if the amount of net capital allowances had, instead, been an amount of agricultural expenses.

Example: restrictions on sideways relief: insufficient relievable income over two years to absorb loss

Guy’s rental business makes a loss of £30,000 in 2005-06 after taking into account capital allowances. For that year Guy has net capital allowances (after deducting balancing charges) of £35,000 for his rental business. The entire loss of £30,000 is therefore eligible for sideways loss claims for 2005-06 and 2006-07, (ICTA88/S379A (3)).

Guy has no rental business losses brought forward under ICTA88/S379A (1) at 6 April 2005. But Guy’s total relievable income for the two years together is £20,000 and relief for this amount only can be given sideways, (ICTA88/S379A (3)).

The balance of Guy’s 2005-06 loss (£10,000) can be carried forward under and set against later rental business profits but not against general income, (ICTA88/S379A (1)).

If Guy claims sideways relief, he will lose the benefit of his personal allowances for 2005-06 and 2006-07. Guy needs to consider all the consequences carefully before making a claim, bearing in mind that he can’t claim part of the loss sideways. For example, depending on the facts, it could pay Guy not to claim sideways loss relief because his personal allowances could then be set against his other income for 2005-06 and 2006-07 and the amount of loss relief to go forward against future rental business profits would be greater. A decision might need to take into account both the total amount of relief available overall and the cash flow advantages of early relief.

Claims for loss relief generally

To make any of these loss claims, a taxpayer should tell their tax office in writing that:

  • their rental business has made a loss,
  • which kind of loss relief they want to claim,
  • the year in which the loss was made, and
  • the year for which they want to use the loss relief.

They must make a claim within the time limits set out above, and relief for each £1 of loss can only be allowed once.

Under SA the claim should be accompanied by the appropriate amendment to the taxpayer’s self assessment (SALF603). Where a claim is subject to enquiry the action required to give effect to the claim need not be taken until that enquiry is complete. However, the officer making the enquiry has the discretion to give effect to the claim, in whole or in part, on a provisional basis (SALF607).