During the COVID-19 pandemic, landlords may find that tenants are unable to pay their rent, and, when a let comes to an end, that they are unable to re-let the property, or have to accept lower rent. As a result, they may make a loss on their property rental business.
Calculating the loss
Any loss arising from the property rental business is calculated in the same way as profits. Where the cash basis is used, as will generally be the case being the default basis of preparation for most smaller landlords, the loss for the period will be the cash received by the property rental business less the cash paid out.
Automatic set off against properties in the same property rental business
As profits and losses are calculated for the property rental business as a whole, if there is more than one property in the rental business, a loss on one property is automatically set against any profit from other rental properties in the same business.
A landlord has three properties that he lets out. In 2019/20 he makes a loss of £3,000 on property A, a profit of £2,000 on property B and profits of £1,500 on property C.
The loss on property A is set against the profits on property B and C when calculating the overall result for the property business as a whole. Overall, the property business has a profits of £500 (-£3,000 + £2,000 + £1,500).
Utilising a loss
The general rule is that a loss on a property rental business can be carried forward and set against profits from the property rental business in the following year. If there is a loss in the next year or profits are not sufficient to fully utilise the loss, any unused part of the loss can be carried forward to the next year and so on until it can be used. There is no limit on the number of years for which the loss can be carried forward.
The same property business
Losses can only be set against the future profits of the same property business. If the landlord has more than one property business, for example a UK property business and an overseas property business, the losses from one cannot be set against the profits of another. Losses from a furnished holiday letting business can only be carried forward and set against profits of that business.
A landlord has a property rental business. In 2017/18 he makes a loss of £5,000, in 2018/19 he makes a profit of £4,000 and in 2019/20 he makes a profit of £3,000.
The loss of £5,000 is carried forward and £4,000 of it is set against the profits of 2018/19, reducing the profits for that year to nil. The balance of the loss of £1,000 which cannot be used is carried forward and set against of 2019/20, reducing the taxable profit for that year to £2,000.
Losses lost if property rental business ceases
If the property rental business ceases before the losses have been used up, the losses are lost. This remains the case if the landlord starts a new property business after a gap as the new business will be a different property rental business.