For UK tax purposes, all sources of rental income are regarded as being derived from the same single property rental business, except for furnished holiday lettings (FHLs). Thus, two distinct and separate ‘pools’ are created should there be both UK property lettings and UK FHLs in a portfolio. In addition, EU lettings and EU FHLs are separate activities, again creating two separate ‘pools’. Lettings outside of the EEA do not qualify as FHLs.
This ‘consolidation’ approach means that the property rental business does not cease just because one property has been sold, or the rental ceases from one property. So long as one property is being let then the property rental business continues. Obviously, should the business only comprise one property, the business would cease when the last tenant left and the landlord decided that the property would no longer be let, or if he decided to use the property as his main residence.
There are some instances where the property rental business might appear at first sight to have ceased, but in reality there was a ‘gap’ being a dormant period before the business restarted at a later date. Various factors will assist in deciding whether cessation has taken place; for example, the length of time between lets, whether the same property is being let, and whether the letting remains the same type. If, for example, prior to the dormant period the property was let unfurnished but following the dormant period the property was let as furnished lettings, HMRC may consider that the one business ceased and a separate one commenced.
HMRC may also try to argue that a business has ceased should the landlord let a residential property which is then sold and the proceeds reinvested in a long term venture or product, but subsequently the landlord recommences letting. In this instance, HMRC may contend that the venture is not liquid enough to enable the landlord to repurchase another property when desired and the letting business has ceased.
The business will not normally cease if there is a gap between lets or there are no lets for a period to enable renovations etc., to be undertaken. HMRC generally regard a business as ceasing if there is a gap of at least three years between lets. The business would normally be regarded as ongoing if another rental property is acquired within three years of sale and the landlord can prove that he was trying to continue with the business (see HMRC’s Property Income manual at PIM2510). In addition, HMRC may regard the business as having ceased if the property was no longer let as it was being used as the taxpayer’s main residence and then is subsequently re-let at a later date.
The problem of whether there has been a cessation of property business will only arise should the landlord own one or two properties; owners of multiple properties are unlikely to be refurbishing all properties or have them untenanted all at the same time, and as such the business continues.
Monies may be received even after the business has ceased. Such receipts could include an insurance payment or the recovery of unpaid rent. In this instance, the receipt cannot form part of the income of the property rental business, as that business no longer exists. Such receipts will be taxed separately, and deemed to be a receipt not otherwise chargeable to tax as miscellaneous income (ITTOIA 2005, ss 349–355).
Expenses incurred in the running of a property business will have been spent in order to generate income, and as such can be deducted from income received during any year that the business is ongoing. If the landlord owns another let property, the property business would continue after the letting of the property in question ceases, with any subsequent expenses being deducted from the overall rental income of the property business on a continuing basis.
In addition, should there be any post-cessation receipts, any post-cessation expenses can be offset. However should the business be deemed to have ceased, there will be no income against which relief can be claimed. One way around this is to ensure that any expense (if known of at the time) is accrued (allowed) for in the final accounts, so that tax relief will be available. The crucial factor is not when the expense is paid or the date on the invoice, but when the expense was incurred.
Should there be no receipts to claim offset, relief may still be available for post-cessation bad debts and certain specified expenses incurred in connection with the former property business. This relief applies where the landlord makes a ‘qualifying payment’ or there is a ‘qualifying event’ in connection with the former business within the seven years of the business ceasing (ITA 2007, s 125). In this situation, sideways relief is available against other income received, such as PAYE employment earnings during the tax year of claim. If the full amount of claim for post-cessation property relief is not possible, the taxpayer may be able to treat the unused part as an allowable loss for capital gains tax purposes (ITA 2007, s 126).
The claim must be made by the first anniversary of the normal tax return filing date for the tax year in which the deduction is to be made.
Losses from a property rental business can only be offset against future profits from that continuing business, such that should the business be deemed to have ceased, the benefit of those losses is lost. The losses cannot be carried back in a form of cessation relief; nor will they be available to be carried forward for offset against future profits should a new letting business commence at a later date.
When property ceases to qualify as FHLs, any losses incurred to the point that the property ceases to qualify stay with the FHL business, and can only be offset against profits of other FHL properties or carried forward to be used against future income of the same FHL business.
Whether a property letting business has ceased is a matter of fact, but so long as another rental property is purchased within three years of cessation and excess of expenses over rental income can generally be carried forward and offset.