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Using Losses To Reduce Your Income Tax Liability

May 21, 2013

Posted by Simon Misiewicz on 21st May 2013

Are you making due to pay your Income Tax?

Do you have any losses that can be used to reduce your tax liability?

There are many people that are paying Income Tax but they are not taking up the opportunity of using their losses or allowances.  Indeed this means that there are a lot of people paying more tax than they need to.

There are different ways of reducing income tax by using losses:

  • relief against general income to the extent the loss is due to certain capital allowances
  • sideways relief against general income to the extent the loss is due to certain agricultural expenses
  • sideways relief against general income to the extent the loss is due to furnished holiday lettings

Landlords can offset the losses they have made in their rental business where capital allowances are to be utilised. This may be done in two ways (3)

  • the tax year in which the rental business loss was made, or
  • the tax year following that in which the rental business loss was made.

Where a taxpayer claims sideways loss relief, they must take the full amount of the loss available up to the amount of their general income. They can’t opt to take a smaller amount – either they claim for the full loss or they claim for none (1).

The loss is limited to the smaller of the two (3).

If the losses are deemed to be caused by ordinary activities then they will not be allowed (5).

For landlords this should not cause alarm.

Refurbishment works to bring a property into use is not “ordinary activities”, albeit capital allowances caused by replacement of assets could easily be seen as ordinary activities.  My view is that capital allowances for purchased properties that are immediately incurred can be used to offset other taxable income if losses arise.

  • the amount of the rental business loss made in the year,
  • the net capital allowances after setting off any balancing charge

The landlord is allowed to carry forward any losses and use them against future profits in the same income stream.  This means that any residential losses in years 2013/4 may be used to reduce the taxable income in year 2014/5 and subsequent years until the losses have been used up (2).

A landlord is not allowed to claim rental losses against other income streams in future years. The landlord is therefore required to offset residential losses against current and past tax years (2). Capital allowances must be claimed within 22 months of the losses being identified (3).

At this point of the article we are certainly overdue an example:

Here are some details for Oliver:

  • 2011/12
  • £20,000 Rental losses including capital allowances
  • 2012/13
  • £25,000 Total Income
  • £15,000 Rental losses including capital allowances

Total Income =  £25,000 Less 2011/12 Loss = £20,000 Profit remaining   = £5,000
Less 2012/3 loss   =  £5,000

The loss of £10,000 may therefore be taken forwards into next year’s rental business profits (3)

So how do people make a sideways claim?

To make any of these loss claims, a taxpayer should tell their tax office in writing that:

  • their rental business has made a loss,
  • which kind of loss relief they want to claim,
  • the year in which the loss was made, and
  • the year for which they want to use the loss relief.

There were suggestions that this relief would be limited to just £25,000 but HMRC are still reviewing the situation (4). HMRC are likely to review any capital allowance losses in excess of £25,000 (5) this is focusing on individuals that spend less than 10 hours per week in their activity (6).

In any case such as these it is always better to speak with HMRC or to get your accountant to clearly and concisely document the sideways loss relief before submitting the tax return.

I know that this article may be a little hard going, especially if you are reading this after a long day.

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References:
(1)PIM4205 – Losses: Overview
(2)PIM4210 – Losses: Set Against Future Profits
(3)PIM4220 – Losses: Set Against General Income
(4)Sideways Loss-Relief Options Put On Hold
(5)BIM75765 – Computing The Amount To Assess: Trade Losses – Restriction Of Relief
(6)BIM75766 – Computing The Amount To Assess: Trade Losses – Restriction Of Relief – Annual Releif

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Email: simon@optimiseaccountants.co.uk