Offsetting property losses
Where an individual lets property, the profit or loss is calculated just like for any other trade (there are different rules for companies). All expenses, including interest paid on loans used to fund the property business, are deducted from the rental income. If the expenses exceed the income the result is a loss.
This loss can generally only be set against future profits from property. However, where some of the loss relates to capital allowances, that part of the loss may be set against the taxpayer’s other income in the same or the next tax year. All the loss may be deducted from other income if the property is commercially let as furnished holiday accommodation (FHL).
Using capital allowances
Capital allowances can be claimed for expenditure on equipment and certain fixtures used in the property business, but not where the equipment is used within, or attached to, residential property that does not qualify as FHL.
Capital allowances are normally given at 20% of the cost each year, or 10% for fixtures that qualify as ‘integral features’. However, where expenditure (excluding cars) falls within the Annual Investment Allowance (AIA), 100% of the cost is deducted in the year of purchase. The AIA is capped at £100,000 per year.
Integral features
Landlords of commercial properties often spend large amounts on refurbishing their buildings. Where that expenditure is incurred after 5 April 2008 in the following categories, it qualifies as integral features, and may fall under the AIA cap:
Electrical systems, including lighting;
Cold water systems;
Space or water heating systems;
Powered ventilation and air-conditioning systems;
Lifts, escalators and moving walkways; and
External solar shading.
A 100% cost deduction under the AIA can create a significant loss, which is available to set against the landlord’s other income.
However, where the loss is generated by using the AIA after 23 March 2010, and there was a plan to deliberately avoid tax through the use of the loss, the taxpayer may be barred from setting-off the loss against their other income. In this case the loss will only be available to set against future profits from property.
If you’re wondering what the right decision is for you and your business, please get in touch with us.