In our regular Q&A series from Croner Taxwise, tax adviser, Marsha Haywood explores where an individual may make a claim to set a rental business loss against their general income (pension income)
Q. I own a couple of fields that I rent out to a local farmer. After deducting expenses, I have made a loss this year which I would like to use against my pension income. Is this possible or, as it is a rental loss, do I have to carry it forward to set against future rental profits?
A. Normally, losses made in a rental business can only be carried forward and set against future profits of the same rental business. However, there are limited circumstances where an individual may make a claim to set a rental business loss against their general income (in your case, pension income).
The legislation at Income Tax Act (ITA 2007) s120 states that where a person has made a rental business loss and the rental business includes agricultural land, they make a claim to have the agricultural part of the loss set against their general income.
The relief is available where the business has a ‘relevant agricultural connection’. A business has a relevant agricultural connection if it relates to land that is, or includes, an agricultural estate and if allowable agricultural expenses attributable to the estate are deducted in calculating the loss.
An agricultural estate means land, including houses and other buildings which is managed as one estate, and which consists of or includes any agricultural land. ‘Agricultural land’ means land, houses or other buildings in the UK occupied wholly or mainly for the purposes of husbandry.
Allowable agricultural expenses are defined in Income Tax Act (ITA 2007) s123 as expenses attributable to the agricultural estate in respect of maintenance, repairs, insurance or management of the estate but does not include any interest on a loan in respect of the land.
The amount of loss eligible for relief is the smaller of
- the amount of the rental business loss made in the year, or
- the expenditure on repairs, maintenance, insurance or management of the agricultural land.
The loss can be set against income of either
- the tax year in which the rental business loss was incurred or
- the tax year following that in which the rental business loss was made.
If the loss is not fully used in the chosen year, the person may make a separate claim for relief against the other year’s general income.
A claim for property loss relief against general income must be made on or before the first anniversary of the normal self assessment filing date for the tax year specified in the claim.
It should be noted that under Income Tax Act (ITA 2007) s127BA this sideways relief is denied where the individual uses the cash basis to prepare the rental accounts.
There is an additional limit on the amount of income tax relief that an individual can claim as a deduction against general income, this is limited to the greater of £50,000 or 25% of the individual’s adjusted total income.