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This month’s tax Q&A answers more tax questions. These questions will focus on how to handle different types of losses incurred by property investment.
Can I Offset These Losses Made from A Property Loss In Year Two?
Question:
In year one, I earned income from a house sale, but made a loss from a house sale in year two. Can I offset the loss incurred in year two against income earned in year one, or alternatively any income that is earned in year three?
Answer:
The answer to this question depends on whether we are discussing capital gains and losses, or trading gains and losses. If the two houses sold are investment assets, so that in year 1 you made a capital gain and in year 2 you made a capital loss, then the general rule is that a capital loss cannot be carried back and offset against a capital gain in a previous year (see CG15811). However, the capital loss in year 2 can be carried forward to set off against a capital gain in year 3, or future years (see CG15810). However, if you are a property developer so that in year 1 you made a trading gain, and in year 2 you made a trading loss, then the story is different. A trading loss in a tax year can be set off against general income of the tax year of loss and/or the previous tax year (see BIM85015). Alternatively, this trading loss can be carried forward to a future tax year to be set off against profits of the same trade (see BIM85060).
Can I Utilise My Own Loss Relief for my Wife’s Properties?
Question:
My wife and I own 100% of four UK properties (2 each) and my properties are making losses whilst my wife’s are okay. We want to utilise rental losses in a tax efficient way and not have to worry about capital gains tax, etc. Would my wife be able to transfer 100% of her property to me so that I can utilise my prior and present losses? Would the outcome be the same if my wife transferred 50% instead of 100%?
Answer:
If you look at PIM4205 and PIM4210 in the Property Income Manual you can see that rental business losses can be offset against profits from the same rental business, either in the same year or carried forward to a future year. If you expand your rental business by obtaining new (profit making) properties while at the same time continuing your present rental business, then that is considered to be the same rental business, and the old brought forward losses can be set off against the new profits, for tax purposes. But your wife would need to make a proper, bona fide transfer to you of the properties (or at least the beneficial ownership of the properties) for this to work. The same would apply if she only transferred 50% of her properties to you, but then of course only 50% of the profits would be available to you for offset. If it is acceptable to you to receive only 50% of the profits, then an alternative is for her to transfer even a minimal amount of the properties to you, e.g. 5%, and put the properties in joint names. If you DO NOT send in a Form 17, since you and your wife together own the properties, then due to the 50:50 rule half the property income will be deemed to be yours for tax purposes, and consequently available to you for offset. See the Trusts, Settlements and Estates Manual here.
If We Sell At A Loss, Will We Still Have To Pay CGT?
Question:
We are looking to move and are considering a buy-to-let scheme on our house in order to rent this property out. We purchased the property at £250K and it is currently valued at £230K. If we rent the property out for a year or two and then sell at £230K, will we still have to pay CGT even though the sale was at loss to the original purchase price?
Answer:
If you look on HMRC’s website at the Capital Gains Manual at page CG14200 you can see that the capital gains computation is simply the disposal proceeds less the original expenditure. In your case this results in a negative £20,000 figure so you will have no CGT to pay.
For more tax advice and guidance, read Arthur Weller’s full book ‘247 Property Tax Questions Answered’ – available in the Landlords’ Tax Pack.
