Property losses – do I need to do a tax return?

Question.

I have a Buy to Let property, but because of the size of the mortgage, I do not make any profit from it. I am employed and have never submitted a tax return before- do I need to now?

Answer.

What with mortgage interest, repairs and empty periods to deal with, most buy-to-let property investors sometimes make a rental loss on their property. They then want to know whether they can claim any sort of tax refund or tax relief on that loss. It sounds reasonable, but unfortunately the tax system is not very generous about rental losses.

If there is more than one rental property (other than a furnished holiday property), each year the profit or loss on each one is added together, and the owner is taxed on the net total. So if there are a handful of properties, some of which make a profit and some of which make a loss, and the losses are less than the profits, then there will be full, immediate, automatic tax relief. If the rental losses are more than the rental profits, there will be some measure of immediate, automatic tax relief. Any surplus loss, or the loss from a single rental property, is dealt with as follows.

First of all, there is no automatic, general right to offset the loss against other income, such as from a job or a business. If a person usually makes a profit from their rental property each year, and they are in employment, the tax on this profit may be collected each year through their PAYE tax code. In the year in which there is no profit there will probably be a refund of the over-deducted tax, but this is not the same as getting tax relief on the rental loss.

That is not to say that there is no tax relief at all on a rental loss. Any loss is carried forward to the next year in which there is a rental profit (from the same property, or a different one), and used to reduce that profit. If the rental property business never makes a profit before it ends, the tax relief would then be lost forever.

The key point here is that as long as the person owns at least one buy-to-let property which is being rented out, or there are only short gaps between properties, the rental loss can be carried forward indefinitely. This reduces the chance of never getting the tax relief.

Although you have no income to tax from your property, you would probably benefit from documenting the losses by submitting a tax return. Having a clear record of the losses will allow you to carry forward the losses and offset them against future profits you make from the property.

Please note, you are obliged to submit a tax return if your gross rents (i.e. the income from the property before deducting any expenses) are over £10,000 per annum or if your profits are over £2,500 per annum (i.e. after expenses have been deducted). This is irrespective of whether the property is profitable or not.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.