With the property market still depressed, today I am going to take a run through some of the tax issues which may be important for those people who bought investment properties to let out, or perhaps to rent, and now can’t sell them.
Nobody likes losing money, but by knowing the tax rules about losses you can minimise your tax bills and make the best out of a bad job.
Landlords may have rental losses if their expenses are more than their rents. This is particularly likely when paying high interest rates or if there are months without a tenant.
It is important for landlords to know that they must tell HM Revenue and Customs if they are letting out a house or flat — even if they are making no money on it.
Against any rents receivable the landlord can claim rates, normal repairs, upkeep of the garden, insurance and mortgage interest.
Note if you pay a repayment mortgage then only the interest portion of your payments counts for tax relief.
When all rents and expenses are taken into account there is one further relief available — but only if your property is let furnished. You can claim a 10% wear and tear allowance to acknowledge that you will have to replace furniture from time-to-time. This allowance is worked out as follows 10% x total rents (less rates paid). Over a number of years this is a generous allowance.
If you make a profit then you will pay tax on it. Note that if the property is owned jointly then each owner must declare their share of the rents and expenses.
Today’s article is focusing on losses. If you make a rental loss then you cannot set it against your income from other sources to save you tax. (Only with furnished holiday lettings can you do that — these are rare and soon to be abolished.) The rental loss simply gets carried forward to next year.
If you make another rental loss next year the two get added together and the bigger loss carried forward. Once you make a rental profit then the losses are set against it. This will either save you tax or avoid you paying tax at all on that year’s profit.
Losses keep getting carried forward until they have all been used up against profits. If you stop renting properties the losses will expire and be no use to you.
Another loss due to the property market is a capital loss made on selling a property. Let’s say you bought a house at the top of the market and paid £600,000. Now the bank is putting you under serious pressure and you have to sell it to clear the loan. If you are forced to sell for £450,000 then you will have lost £150,000.
So what happens to a capital loss like this? Well a bit like the rental loss it cannot be set against your income for any sort of tax saving. The first thing a capital loss is set against is other gains in the same tax year. So if you sold shares and made £1,000 on them then £1,000 of the loss is used to cover this gain. Unless you have other gains then any capital loss is simply carried forward.
Here there is a big distinction between rental losses and capital losses. A capital loss is carried forward until any year when you need it. That might be in 20 years when you sell your holiday home in France.
The best thing about using carried forward losses is the interaction with the CGT annual exempt amount. For 2009/10 the exemption means you pay no CGT if your gains are under £10,100.
When you have losses carried forward and you make a gain these losses are only used if your gains exceed the exemption. So if in 2009/10 you make gains of £9,000 then your losses brought forward of £150,000 are not touched. The full amount continues to be carried forward.
Let’s then assume that you made a gain of £20,100. Only some of the loss brought forward is needed. And indeed it’s only so much that brings you down to the exemption of £10,100. This means that £10,000 of the loss is used and the gains end up at £10,100 — the same as the exemption. No tax due. The capital loss to carry forward is therefore £150,000 less £10,000 = £140,000.
Without going into the details the above means that if you make a capital loss in one year you should try not to make a capital gain the same year. Better to make the capital gain in a later year.
The final loss which can be relevant is for people registered with HMRC as property developers. If the value of their stock has reduced below what it has cost them then they can reflect this in their accounts. This will save them tax. Since they will almost certainly have advisers they should discuss it with their accountant.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.huston.tv or 028 9080 6080