We have a new client who rents out a property that he jointly owns with his wife. Since the activity began this has been loss making and our client’s previous agent has never completed a return for the wife.
However, due to the fall in interest rates the property has made a profit for the first time this year.
With the losses brought forward there is no tax at stake, however my advice generally has always been that to bank the losses of a rental property a tax return needs to be filed each year.
As Mrs has never filed a return she has no disclosed losses to set against this profit.
If I had advised this client from the beginning Mrs would have been doing returns since the year dot and this would not be an issue.
My feelings are to tread carefully and send a simple letter to the taxman stating joint property with husband 50/50, profit this year of X, but same losses brought forward as husband (being ten times the amount of profit), asking them if under the circumstances they require her to complete a return each year.
What would other readers suggest as best advice?
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Replies (9)
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Wife of Client with rental income
Has wife got other income.
How many years are we talking about.
No problem
I've had no problems with sending in a return with rental profit and setting of (previously unclaimed) losses. A return is required if there is a profit and tax is due - not for a rental loss. Just provide details of the losses for earlier years (which HMRC can easily verify if it's the same as the husband's anyway).
Cathy
Other Income
Yes she does have other income and there would be a liability if it were not for the losses.
I had always beleived you needed to complete a return to bank the losses, clearley I am wrong.
I guess an annual account of the losses would be a good idea though for when and if you break into profit.
Thanks for the swift responses.
Jim.
Agree with Cathy ..
.. in fact of late I've noticed HMRC will often seek to take people out of self-assessment if all they have is rental losses and taxed at source income on their return. I would put the brought forward losses on the return and a note in the white space cross-referring to the husbands UTR.
Just a point
In his response, the OP says:
"Yes she does have other income and there would be a liability if it were not for the losses."
Well, two points actually:
1. If she has other income, she should have been completing tax returns unless the other income was entirely under PAYE or interest, etc., on which tax had been deducted at source and also, the total did not put her into the higher rate tax band.
2. I trust that she was not setting off the property letting losses against the other income.
Different reading?
@ Euan - I had read that comment as meaning she had used her allowances against other income and, therefore, would be liable on the rental income if it had been in profit. But if I'm wrong, you have made a very valid point as property losses certainly can't be deducted from other income.
Cathy
Agree with all of the above
but just to dispel any confusion held by the OP, there is a distinction between the compliance requirements in dealing with c/fwd of property income losses contrasted with trading losses.
In the case of a *trade*, the loss to be carried forward must be CLAIMED (s.83 ITA 2007) while in the case of a property business the loss is carried forward automatically (s.118 ITA 2007). Where a claim is required, the default time limit is 5 years following 31 January following the end of the tax year of claim (although where a repayment results for the earliest years then it may now be time barred for the repayment claim, but that would not be relevant in this case).
If an individual is *trading* (at a loss) and let us assume that he is over pensionable age so has no separate obligation to notify chargeability to class 2 NIC (and possibly separately claim exception for low earnings as a separate exercise), then he could likewise carry on without reporting it (assuming he does not want sideways or backward relief), but then he may wish to register as self employed before the 5 year time limit expires.
With kind regards
Clint Westwood
Other Income
Hi Guys
Thanks for all the comments, the other income is just employment income covering PA etc and there would be no further liability were it not for the rental income.
Property losses have not been claimed against other income (as not arising as a result of capital allowances).
So if Im understanding Clint properly as no claim is required for property losses to be c/fwd my clients wife can benefit from these looses by simply stating these as b/fwd on her first return with supporting details in the white space, ie cross reference to husbands return as per Steve.
But as the losses wipe out the property profits does a return even need to be completed in the first place???
I would assume the loss set off is a "claim" and hence needs to be made on a tax return so the answer is yes.
Thanks
Jim.
HMRC Guidance
HMRC guidance says you should complete a tax return if you have:
income from property (before deducting allowable expenses) of £10,000 or more and/orincome from property (after deducting allowable expenses) of £2,500 or more
Not that your client could be in any trouble if the income was more than £10k but correctly deductible expenses created a loss as there would be no loss of tax.
You could just write to HMRC on your client's behalf saying the profit is x and the loss brought forward is y so there is no tax due and a loss carried forward of z. If they've got any sense, they will just issue a return for 2010/11 onwards only.
As has been mentioned, the loss carried forward doesn't have to be claimed, it is given automatically.
Cathy