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What are the correct property loss rules?

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I'm trying to clarify the rules for offset of rental losses. Am I correct that:

a) Non-FHL losses in the current year can be offset against FHL profits of the same year.

b) FHL losses in the current year cannot be offset against non-FHL profits.

c) Non-FHL losses b/fwd and FHL losses b/fwd can only be used against the same type of rental income.

Replies (14)

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By Accountant A
13th Jan 2020 16:27

I think it's covered in Income Tax Act 2007 and HMRC's Property Income Manual. I can't remember what the offset is, offhand.

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Replying to Accountant A:
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By The Dullard
13th Jan 2020 17:18

It's partly in ITTOIA 2005, where it should be, and partly in ITA 2007 , to help create confusion, and the Property Income Manual isn't entirely clear on the point.

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By The Dullard
13th Jan 2020 17:16

Those are HMRC's "rules", save that they accept that, IIRC, they think that non-FHL losses can be carried forward and used against FHL profits (that may just be where the losses arise from the smae property), but not the other way around. It has little correlation with the legislation.

There is professional debate on the effect of the legislation, but either they can be offset in the process of aggregation (within the single property business) both ways or they just can't be offset in any way at all. Personally, I favour the former view.

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Red Leader
By Red Leader
13th Jan 2020 18:00

F*ing hell! What a horlicks. Thanks for your replies.

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By ireallyshouldknowthisbut
14th Jan 2020 09:51

Just for fun, whilst the rules on using all of the loss in the next accounting period are worded the same as for for sole traders (see other Q today), we have observed that if a landlord filed their own tax return and forgets to offset the losses against current year profits, and carry them forward HMRC don't seem to notice.

*post edited for clarity*

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
14th Jan 2020 06:13

Hm. Whether HMRC notices is not a test I've seen anywhere in any legislation. I'm sure others (obviously not you) have sought to rectify mistakes with deliberate errors, but it's not something anyone should do lightly, let alone recommend.

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Replying to Tax Dragon:
By SteveHa
14th Jan 2020 08:59

Tax Dragon wrote:

....but it's not something anyone should do lightly,

Or, indeed, at all.

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Replying to ireallyshouldknowthisbut:
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By Wanderer
14th Jan 2020 06:52

Yep, and if you fraudulently complete any other aspect of a tax return HMRC "don't seem to notice" either! Well often not for many years then you get the (name escapes me) type of situation and end up doing jail time and thousands of clients end up with back duty, penalties and interest.

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Replying to Wanderer:
By ireallyshouldknowthisbut
14th Jan 2020 09:50

I think you misunderstood my post, which I have amended slightly.

We do it right, but we pick up a lot of stuff from other accountants/DIY landlords [we wouldn't get it if they were decent of course] and its an observation that is losses are badly used HMRC don't seem to notice.

The point being that despite the complex rules in this area, HMRC don't seem to be very on the ball with it.

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Replying to ireallyshouldknowthisbut:
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By Tax Dragon
14th Jan 2020 09:59

ireallyshouldknowthisbut wrote:

I think you misunderstood my post, which I have amended slightly.

Feedback: it's now much clearer. (Nudges and winks are too easy to read in, even if they weren't intended.)

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Replying to ireallyshouldknowthisbut:
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By Wanderer
14th Jan 2020 10:01

ireallyshouldknowthisbut wrote:

I think you misunderstood my post, which I have amended slightly.

Personally I don't think I did. TD & SL appear to have interpreted the 'nudge nudge, wink wink' tone of your original post similarly. You, however, have changed the wording of your post. Not good form after others have responded.
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Red Leader
By Red Leader
14th Jan 2020 18:09

The background to my question is that I wanted to give a definitive summary of the tax position to a client with existing non-FHL income and losses b/fwd, who is now adding FHL.
I think I might just keep quiet rather than give him an unequivocal view as the latter doesn't seem to exist.

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By richard thomas
16th Jan 2020 22:30

Here's a fairly unequivocal view.

If the questions are about income tax, then the answers to the questions are:
a) No (my view) but HMRC disagree.
b) Yes.
c) Yes.

My reasoning is this.

As to question a), the law says that:
• Losses of a UK or foreign property business (PB) are set against profits of the same business (ie the UK or foreign PB in question) in following tax years - s 118 ITA 2007
• But a claim may be made to set a UK or foreign PB loss against general income of the loss year or the next year if the loss has a “CA connection” or a “relevant agricultural connection” - s 120 ITA 2007.

In the first instance no split is made in computing the profits of a PB between the FHL and non-FHL parts, if there are both activities comprised in the same UK or foreign PB, because in law the FHL and non-FHL parts are comprised in the same property business (s 264 ITTOIA). But if a claim is made for capital allowances in either or both of the two parts of the PB, or if any provision of loss relief applies to a loss in either part, a separate calculation is required (sections 327 and 328A ITTOIA). This seems a little circular in relation to losses as it is difficult to see how, without making a separate calculation, you discover whether there is a loss and the amount.

Where the separate calculation is made because of a CA claim then it by no means follows that there will be a loss in either part. On the face of it the two calculations are made giving effect to the CAs in the separate calculations and the results combined to give a single figure of PB profits – this is how HMRC’s tax calculation software works (see eg the SA 110 Notes at page 5 boxes A28 to 32 and at page 10).

If there is a separate calculation because there is a non-FHL loss and that calculation shows there is an FHL profit, it seems to me that the non-FHL loss can only be used in the way prescribed by Part 4 ITA given the wording of s 327 or 328A ITTOIA. As the carry forward of the loss under s 118 ITA 2007 is not subject to a claim but is a mandatory calculation it follows that nothing else can be done with the loss other than as a carry forward. It cannot be set against an FHL profit.

HMRC disagree (see SA105 Notes page UKPN 5 on box 14). The notes tell one that any non-FHL loss of the year can go in box 14 and so be deducted from a FHL profit.

As to question b) Part 4 ITA 2007 includes both trade losses (Chapter 2) and PB losses (Chapter 4). Section 127 ITA 2007 provides that, for the purposes only of Part 4 ITA, FHL is treated as the carrying on of a trade consisting of all FHL property comprised in a PB. So if there are FHL losses they are given effect to only under the trading rules of Chapter 2, not the PB rules of Chapter 4, (but crucially with the omission of sections 64 to 82 and 89 to 95). This means no set-off against other income is possible, nor can terminal losses be carried back. So the only relief under Chapter 2 that is available is carry forward against income from the same trade, ie the FHL part of the UK PB. This too is mandatory and not the subject of a claim, so in my view it is not possible to opt out of carry forward with the result that the loss cannot be set against the profits of non-FHL PB. HMRC agree with this (see PIM4120)!

But the carry forward of a loss as from a trade seems, prima facie, to lead to an odd position. Section 83 ITA says that the loss carried forward may only be set-off against trading profits. But if in the next year the FHL part of the PB has profits, they are not treated by anything in Part 3 ITTOIA as the profits of a trade.

If that were the legal position it would in effect make the ability of the owner of a FHL business to use any losses completely nugatory. What I think makes the position sensible is a close look at the wording of sections 127 and 128A ITA. That section does not require that in the tax year concerned there must be a loss arising from treating the FHL business as a trade: it simply treats the FHL business as a trade for the purposes of Part 4 ITA 2007. Section 83 ITA is of course part of Part 4 and there does not seem to me to be any problem in saying that sections 127 and 128A have the effect of treating the profits of FHL as a trade for the purposes of giving effect to the carry forward.

It might however be argued that before looking at s 127 ITA it is necessary to consider sections 327 and 328A ITTOIA because it is only if one of them applies that it is permissible to make a split and apply the different loss rules to the separate parts. As noted above sections 327 and 328A require a split if either capital allowances are claimed or “any provision of Part 4 ITA 2007 (loss relief) applies in relation to a loss made in either of th[e] parts”. That is slightly different from sections 127 and 127ZA, and seems to prevent the sensible answer I refer to in the previous paragraph. The possible answer is that where s 83 ITA limits the carry forward to the profits of a trade it is being applied “in relation to” a loss.

There is another possible oddity about FHL losses. Where a non-FHL PB produces a loss and the loss has a capital allowances or agricultural connection, sideways relief is possible. Thus non-FHL property business is treated more leniently in that sideways relief is allowable there which seems odd when it is denied to FHL losses. Obviously FHL treatment is more beneficial in many other ways compared with non-FHL PB, but loss treatment is an anomaly. Indeed it is not at all obvious what the point of treating FHL losses as trade losses is now. Scrapping the rules here would seem to be a simplification that would harm very few if any people.

In the above I have in fact explained why the answer to question c) is “yes”. Brought forward losses are only capable of reducing profits of the same type as they arise under different provisions with different rules, sections 83 and 118 ITA.

Corporation tax

If the business in question is carried on by a company then s 62 CTA 2010 holds that losses of UK PB are set against profits of the same business (ie the UK PB in question) in following tax years, or if the PB has ceased the losses may be carried forward as management expenses - s 63 CTA 2010)

Losses of a foreign PB are set against profits of the same business (ie the foreign PB in question) in following tax years – s 66 CTA 2010. The carry forward as management expenses is not possible (and probably therefore discriminatory).

Sideways set off of PB losses against general income is not possible.

But if there is part of a UK or foreign PB which are FHL and a part not, sections 269 and 269A CTA 2009 provide the rule (equivalent to that in sections 327 and 328A ITTOIA) that a separate calculations of profit or loss must be made where capital allowances are claimed or Chapters 2, 4 or 6 Part 4 CTA 2010 apply to a loss in one or other of the deemed separate businesses.

Chapter 2 of Part 4 CTA 2010 is about trade losses, and Chapter 4 about PB losses. Sections 65 and 67 CTA 2010 provide that for the purposes of Part 4 only, FHL is treated as the carrying on of a trade consisting of all FHL property comprised in a PB. So if there are FHL losses they can be given effect to only under the rules of Chapter 2 (trade losses), not Chapter 4 (PB losses) and crucially with the omission of sections 37 to 44 and 45A to 45H CTA 2010. This means no set-off against other income is possible nor can terminal losses be carried back. The only relief is, in theory, carry forward against income from the same trade and for FH, but ss 45A to 45E (the 2017 extension to allow carry forward of trade losses against all income) do not apply.

This non-application of s 45A ff. raises another little quirk. The only provision applicable to FHL losses carried forward is s 45 CTA 2010. Section 45(1) says it applies if in an accounting period “beginning before 1 April 2017” a company has a trading loss. The quoted words were inserted in s 45 by the Finance (No. 2) Act 2017 which also introduced s 45A ff. But s 65(4A) CTA 2010 also introduced by the 2017 Act omits the words “beginning before 1 April 2017” where there is an FHL loss and so the loss carry forward is mandatory still. The EEA FHL loss provisions in s 67A CTA 2010 are also mandatory.

It follows that an FHL loss cannot be set against a non-FHL profit: ss 269 and 269A CTA 2009 apply as a loss under Part 4 CTA 2010 is always available and does not have to be claimed. Thus the answer to question b) for CT is also “yes”.

The answer for questions a) and c) for CT is also the same as for IT. I haven’t checked the CTSA returns and Notes to see what HMRC’s view of question a) is.

For CT a further question arises. Can an FHL loss be surrendered as group relief? Group relief is found in Part 5 CTA 2010 so neither sections 62 nor 67A CTA 2010 (FHL losses treated as trade losses) apply in terms, as they only apply for the purposes of Part 4. So too is s 269 CTA 2009 restricted to Part 4. It is necessary then to examine Part 5 more closely.

Section 99 provides that a company may surrender a trading loss (ss (1)(a)) and a UK PB loss (ss (1)(e)). “Trading loss” means a loss in a trade (s 100 CTA 2010) and a UK PB loss as a loss made in a UK property business. Which does a company with FHL have? In my view it has a PB, not a trade, for group relief purposes and that PB covers everything, FHL and non-FHL Sections 65(3) and 67A(3) CTA 2010 seem to me to be decisive of this point. Not that it actually matters much unless the company has other profits apart from PB, where the restrictions in s 105 CTA 2010 would potentially apply to PB losses but do not apply to trade losses.

The main oddity in CT then is that no sideways set off is possible, but group relief is available for surrender. What’s the policy reason for that?

Incidentally this is not just hypothetical. I have an EEA property business which is FHL. In 2017-18 I had a loss in the FHL. As I have no non-FHL overseas PB it isn’t affected by the considerations raised by the OP, but I have investigated this area before. I also had a case as a judge where the appellant company was claiming that its business of B & B with some self-catering cottages was entirely Case I or failing that FHL, and HMRC said it was neither. The company wanted group relief which HMRC said it could not have for property business losses (!). After the evidence of the appellant's officers, HMRC’s presenting officer accepted the whole thing was Case I. I therefore gave a short (and therefore) unpublished decision with an appendix teaching HMRC about group relief.

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Replying to richard thomas:
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By whitevanman
16th Jan 2020 23:58

I am sure I am not alone in being thankful for such a comprehensive reply.
That said, the question of whether a loss arising in a certain class of business can be used in 1 way or two, os a very, very , simple question. The fact that the answer is not equally simple demonstrates better than anything else, just how the whole tax system is crying out for real simplification!

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