Can client carry forward loss on Sch A rental if he lives in it between the loss-making period and the subsequent profitable period?

Can client carry forward loss on Sch A rental...

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Client has a rental property which makes a profit. Then it is vacant for a period, resulting in a net loss for that year. The client then moves into the property himself for a year and then rents it out again profitably. Can he carry forward the loss against the profitable period?

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The triggle is a distant cousin of the squonk (pictured)
By Triggle
26th Apr 2013 20:52

No. If a UK rental business comes to an end then all losses are forfeited.

If he has other UK rental properties that were let throughout this period the UK rental business would have continued in which case the loss could have been claimed (but against the rental profits if any on the other properties first). 

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By Steve Kesby
27th Apr 2013 10:24

You can try

What Triggle says is, for the most part, a fair reflection of HMRC's view on the matter, as set out in PIM2505 and PIM2510. There is on glimmer of hope though, which I'll mention at the end.

The HMRC view doesn't reflect what the statute says though. S.264 ITTOIA 2005 deems every property business that a person carries on in the UK to be part of one single business and S.265 does the same thing for overseas property businesses. This is then expanded on in the Explanatory Notes.

See paragraph 1046 in the Explanatory Notes, which says that S.264 "makes it clear that all the income from a person's UK land interests is treated as falling within a single UK property business"

Then paragraph 1049 describes how "casual and one off transactions", for example, are "all...treated as part of the same, single business".

I might carry out a one-off transaction now and make a loss and then another one-off transaction in a number of years' time and make a profit. Paragraph 1049 says that I can set the loss against the profit.

The only mention of cessation of a property business is then within Chapter 10 of Part 3 of ITTOIA 2005, dealing with post-cessation receipts. S.353 refers to the time when the person "permanently ceases to carry on a [single] UK property business".

Your client might have been carrying on one property business before and a separate property business after their occupation of the property, but they are both deemed by S.264 (or S.265) to be part of the same business, which clearly hasn't ceased permanently.

Obviously though, since HMRC don't share that view, that argument won't necessarily have an easy ride.

Anyway, about that glimmer of hope.

If you look at PIM2510, half a dozen or so paragraphs down you'll find the one that says:

"A general rule of thumb for rental businesses is that the old business stops where there is an interval of more than three years and different properties are let in the taxpayer’s old and new activities. We offer this for guidance only. In practice, we will not normally suggest that the old business stopped where the gap is less than three years and the taxpayer was trying to continue. But the taxpayer would need to provide convincing evidence to show that the same business was carried on where the gap is three years or more."

I'd suggest that that paragraph gives you a tenable position to file an SA offsetting the brought forward loss for a suitably warned client.

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By chatman
28th Apr 2013 17:15

Thanks Steve and Triggle

Thanks to both of you, especially Steve for such a detailed, well-referenced answer.

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By chatman
30th Apr 2013 00:50

.

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By chatman
30th Apr 2013 00:53

Thank you.

Thank you everyone. Your advice has been very helpful.

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