Making a loss

[peterhafod]

I apologise if this has been asked before, but I couldn't find an answer through the search engine....

As a necessity I have to rent out my property whilst working elsewhere, and with the current market rent in my area I am likely to make a small loss, especially when all the 'expenses' are included.

My question is, as I will be filling in a tax return, will I be able to offset this loss against my normal earned income? As a 40% rate taxpayer this would at least ease the loss somewhat.

Many thanks.

[plym77]

Hi Peter

Unfortunately not. Rental losses from normal rental properties are just carried foward to be used against a potential future profits.

If the property was deemed to be a 'Furnished Holiday Let' then that is a different story, losses can be used - however, there are very strict rules to adhere to and if you are looking to make a normal tenancy then you would fail them.

Remember when taking into your account the expenses that you can only deduct the mortgage interest, not the whole amount - the capital element of the repayment cannot be deducted.

Sorry to be the barer of bad news, but ultimately this is your answer.

Regards

Plym 77

Tax Adviser

[fleming]

I recently asked this question of a friend who used to work for the Treasury and knows a thing or two about tax. You can offset your landlord's outgoings against your income. You should ask for the Land and Property Supplement when completing your self assessment tax return. As you are making a loss, you should pay less tax. In our case we are married and the house is in joint names, so we can divide the loss between us. If we get to the point of making a profit, we can notify Inland Revenue that we have elected to allocate all the profit from the rent in my name, as I pay the lower rate of income tax. He said Inland Revenue might not like us doing that, as obviously they lose out, but you have the right to do this, providing you tell IR in advance. I think we could have elected to have all the loss in my husband's name, to lessen his 40% tax, but we didn't notify them in advance. Of course when coming to sell the property, it is best to have it in joint names so you can maximise tax relief for Capital Gains Tax, but that's another story! Keep all your receipts for legitimate landlord expenses for 3yr. This includes insurance, management fees, gas checks, home maintenance and all the other bits you have to pay for as a landlord. Incidentally, keep a record of any agent's evaluation of the value of the property when you first let it out. This figure will be used to calculate the profit made when you come to sell the property.You don't mention if you are married, so my apologies if a lot of this doesn't apply, but perhaps it will be of use to someone else out there. This is all the info I needed for my own circumstances and can only give you my own experience. I am not a tax expert.

[fleming]

I was obviously in the middle of typing my reply when the previous answer was sent. This is not the advice I received, so now I am confused. My experience of tax is that you always seem to get conflicting responses. I feel like selling up now!

[plym77]

Hi Fleming

I am a Chartered Tax Adviser and have a vast experience in this field. I appreciate your response, but you have been misinformed.

If you only have one property (as Peter) you cannot offset the loss of a normal (non FHL) rental property. It is carried forward and used against future profits of the property. If he sells the property, the losses are lost - he cannot offset against other income.

If you have a number of rental properties in a rental portfolio then you can offset the loss of one against the profit of another. But you still cannot offset the loss against your other income.

If Peter makes a profit, then a declaration of trust with his wife to have her having most of the profit (at Basic Rate) may be the way to go.

When Peter comes to sell the property, this is merit in him transferring the property into joint (names) if not done so already - this is for both Annual Exemption and Lettings Relief purposes. But Peter should remember, that there are other periods that he may get the PPR exemption - last 36 months, plus middle periods - like 3 years leaving for any reason, 4 years for employment - providing he returns to live in the property (except last 36 month exemption which you dont need to return for)

Fleming - dont sell up! I suspect you have been given half a story - but assure you that I would not post anything that is incorrect - for my personal integrety.

Regards

Plym77

Tax Adviser

[plym77]

I can see what you are saying now Fleming, I think it would be useful if I clarify....

....and assuming just one property

If you make a loss in year 1 - this can not be offset against other income of Peter in year 1. It must instead be carried forward

Year 2, loss - added to year 1 and both figures carried forward.

year 3 profit - use the losses added up to clear the profit. more losses than profit = carry unsued losses forward. more profit than losses, balance becomes taxable.

beginning of year 4, declaration of trust putting into joint names done... at the end of year 4 the profits can be split husband and wife.

For Married Couples - You can elect for a property to be in joint names (assuming in one name to start), but it cannot be done retrospectively. You would first get a solicitor to draft a declaration of trust (it is not necessary to change the deed), say to a split between husband and wife and then going forward the profits can be split - you cannot reallocate past losses incurred against one person... and there is no point really - you would just ensure that husband retains enough interest to use the losses up. You can in the future issue a new declaration of trust.

This can be further manipulated....

Husband owns 100% of property, but the property now makes a profit and he would like wife to now receive 50% of the income, but would like to retain the majority of capital.

A declaration of trust is put in place - 1% capital owned by wife, 99% husband. Doing this allows (going forward) a 50: 50 split of profits even though only 1% owned by wife.

If this is of interest I can further clarify specifics. This is a quick post as I am in this middle of some stuff at the moment but if anyone has any specific query they want me to elaborate on please let me know

Plym 77

[fleming]

Many thanks Plym77 and apologies to peterhafod for hijacking his original question!For everyone's sanity I think it will be useful for me to pass on these phone numbers I was given today. Apparently the Inland revenue (now HMRC) advice line is really helpful and you don't have to give your own details. The Self Assessment Adviceline is 0845 900 444. The other general advice line I have for HMRC is 0845 303 3535. The website is www.hmrc.gov.uk

[peterhafod]

Many thanks Plym & Fleming...I didn't really expect it to be an affirmative! But I shall indeed note the carry forward for losses. As for the slight divergence, that's all great stuff to know too, so many thanks!

Peterhafod