Income Tax Act 2007

Chapter 4 U.K. Losses from property businesses

Introduction U.K.

117 Overview of Chapter U.K.

(1) This Chapter—

(a) provides for losses made in a UK property business or overseas property business in a tax year to be carried forward for deduction from profits in subsequent tax years (see sections 118 and 119),

(b) provides in limited circumstances for relief against general income for losses made in a UK property business or overseas property business (see sections 120 to 124), and

(c) provides for relief for certain post-cessation payments and events in connection with a UK property business (see section 125).

(2) This Chapter also makes provision for a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation to be treated as a trade for the purposes of this Part (see section 127).

[F1 (2A) This Chapter also makes provision for an overseas property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation in one or more EEA states to be treated as a trade for the purposes of this Part (see section 127ZA).]

[F2 (3) This Chapter also contains provision restricting relief under this Chapter (see [F3 sections 127A [F4 to 127C]]).]

Textual Amendments

F1 S. 117(2A) inserted (19.7.2011) (with effect in accordance with Sch. 14 para. 4 of the amending Act) by Finance Act 2011 (c. 11), Sch. 14 para. 3(2)

F2 S. 117(3) inserted (8.4.2010 with effect in accordance with s. 25(5)-(7) of the amending Act) by Finance Act 2010 (c. 13), s. 25(2)

F3 Words in s. 117(3) substituted (17.7.2012) (with effect in accordance with s. 10(5)-(7) of the amending Act) by Finance Act 2012 (c. 14), s. 10(2)

F4 Words in s. 117(3) substituted (with effect in accordance with Sch. 17 para. 14 of the amending Act) by Finance Act 2014 (c. 26), Sch. 17 para. 9(2)

Carry-forward property loss relief U.K.

118 Carry forward against subsequent property business profits U.K.

(1) Relief is given to a person under this section if the person—

(a) carries on a UK property business or overseas property business (alone or in partnership) in a tax year, and

(b) makes a loss in the business in the tax year.

(2) The relief is given by deducting the loss in calculating the person's net income for subsequent tax years (see Step 2 of the calculation in section 23).

(3) But a deduction for that purpose is to be made only from profits of the business.

(4) In calculating a person's net income for a tax year, deductions under this section from the profits of a business are to be made before deductions of any other reliefs from those profits.

(5) No relief is to be given under this section so far as relief for the loss is given under section 120.

(6) This section needs to be read with section 119 (how relief works).

Modifications etc. (not altering text)

C1 S. 118 excluded (with effect in accordance with Sch. 18 para. 63 of the amending Act) by Finance Act 2016 (c. 24), Sch. 18 para. 20(7)

119 How relief works U.K.

This section explains how the deductions are to be made. The amount of the loss to be deducted at any step is limited in accordance with section 25(4) and (5).

Step 1

Deduct the loss from the profits of the business for the next tax year.

Step 2

Deduct from the profits of the business for the following tax year the amount of the loss not previously deducted.

Step 3

Continue to apply Step 2 in relation to the profits of the business for subsequent tax years until all the loss is deducted.

Property loss relief against general income U.K.

120 Deduction of property losses from general income U.K.

(1) A person may make a claim for property loss relief against general income if—

(a) in a tax year (“the loss-making year”) the person makes a loss in a UK property business or overseas property business (whether carried on alone or in partnership), and

(b) the loss has a capital allowances connection or the business has a relevant agricultural connection.

(2) The claim is for the applicable amount of the loss to be deducted in calculating the person's net income—

(a) for the loss-making year, or

(b) for the next tax year.

(See Step 2 of the calculation in section 23.)

(3) The claim must specify the tax year for which the deduction is to be made.

(4) But if the applicable amount of the loss is not deducted in full in giving effect to a claim for the specified tax year, the person may make a separate claim for property loss relief against general income for the other tax year.

(5) For this purpose “the other tax year” means the tax year which was not specified in the claim already made, but which could have been specified.

(6) This section needs to be read with—

(a) section 121 (how relief works),

(b) section 122 (meaning of “the applicable amount of the loss”),

(c) section 123 (meaning of “the loss has a capital allowances connection” and “the business has a relevant agricultural connection”), and

(d) section 124 (supplementary).

[F5 (7) See also section 127A (no relief for tax-generated losses attributable to annual investment allowance) [F6 and section 127B (no relief for tax-generated agricultural expenses)] [F7 and section 127BA (restriction of relief: cash basis)].]

Textual Amendments

F5 S. 120(7) inserted (8.4.2010 with effect in accordance with s. 25(5)-(7) of the amending Act) by Finance Act 2010 (c. 13), s. 25(3)

F6 Words in s. 120(7) inserted (17.7.2012) (with effect in accordance with s. 10(5)-(7) of the amending Act) by Finance Act 2012 (c. 14), s. 10(3)

F7 Words in s. 120(7) inserted (with effect in accordance with Sch. 2 para. 64 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 2 para. 62(2)

121 How relief works U.K.

(1) This subsection explains how the deductions are to be made.

The amount of the applicable amount of the loss to be deducted at any step is limited in accordance with [F8 sections 24A and 25(4) and (5)].

Step 1

Deduct the applicable amount of the loss in calculating the person's net income for the specified tax year.

Step 2

This step applies if the applicable amount of the loss has not been deducted in full and the person makes a separate claim for the other tax year.

Deduct the part of the applicable amount of the loss not deducted at Step 1 in calculating the person's net income for the other tax year.

Other relief

If the applicable amount of the loss has not been deducted in full at Steps 1 and 2, relief is given under section 118 for the part not so deducted.

(2) There is a priority rule if—

(a) a person makes a claim for property loss relief against general income (“the prior claim”) in respect of a loss made in a tax year,

(b) the prior claim specifies the next tax year as the one for which the deduction is to be made (“the relevant tax year”),

(c) the person makes another claim for property loss relief against general income in respect of a loss made in the relevant tax year, and

(d) that other claim also specifies the relevant tax year as the one for which the deduction is to be made.

(3) The rule is that priority is given to making deductions under the prior claim.

Textual Amendments

F8 Words in s. 121(1) substituted (with effect in accordance with Sch. 3 para. 3 of the amending Act) by Finance Act 2013 (c. 29), Sch. 3 para. 2(3)(c)

122 Meaning of “the applicable amount of the loss” U.K.

(1) This section defines “the applicable amount of the loss” for the purposes of sections 120 and 121.

(2) “The applicable amount of the loss” is—

(a) the amount of the loss, or

(b) if less, the amount arising from the relevant connection (see subsections (3) to (5)).

(3) If—

(a) the loss has a capital allowances connection, but

(b) the business does not have a relevant agricultural connection,

the amount arising from the relevant connection is the amount (“the net capital allowances”) by which the capital allowances exceed the charges under CAA 2001.

(4) If—

(a) the business has a relevant agricultural connection, but

(b) the loss does not have a capital allowances connection,

the amount arising from the relevant connection is the amount of the allowable agricultural expenses.

(5) If—

(a) the loss has a capital allowances connection, and

(b) the business has a relevant agricultural connection,

the amount arising from the relevant connection is the sum of the net capital allowances and the amount of the allowable agricultural expenses.

123 Meaning of “the loss has a capital allowances connection” and “the business has a relevant agricultural connection” U.K.

(1) This section applies for the purposes of sections 120 and 122.

(2) The loss has a capital allowances connection if, in calculating the loss—

(a) the amount of the capital allowances treated as expenses of the business, exceeds

(b) the amount of any charges under CAA 2001 treated as receipts of the business.

[F9 (2A) But any allowance under Part 2A of CAA 2001 (structures and buildings allowances) is to be ignored for the purposes of subsection (2).]

(3) The business has a relevant agricultural connection if—

(a) the business is carried on in relation to land that consists of or includes an agricultural estate, and

(b) allowable agricultural expenses deducted in calculating the loss are attributable to the estate.

(4) “Agricultural estate” means land—

(a) which is managed as one estate, and

(b) which consists of or includes land occupied wholly or mainly for purposes of husbandry.

(5) “Allowable agricultural expenses”, in relation to an agricultural estate, means any expenses attributable to the estate which are deductible—

(a) in respect of maintenance, repairs, insurance or management of the estate, and

(b) otherwise than in respect of interest payable on a loan.

(6) But expenses attributable to the parts of the estate used wholly for purposes other than those of husbandry are to be ignored.

(7) And if parts of the estate are used both—

(a) for purposes of husbandry, and

(b) for other purposes,

the expenses in respect of those parts are to be reduced so far as those parts are used for the other purposes.

Textual Amendments

F9 S. 123(2A) inserted (5.7.2019) by The Capital Allowances (Structures and Buildings Allowances) Regulations 2019 (S.I. 2019/1087), regs. 1, 6

124 Supplementary U.K.

(1) 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.

(2) If a loss has previously been carried forward under section 118, the claim must be accompanied by the amendments of any return made under—

(a) section 8 of TMA 1970, or

(b) section 8A of TMA 1970,

that are necessary to give effect to section 118(5) (reducing the amount of the loss carried forward (if necessary, to nil)).

Post-cessation property relief U.K.

125 Post-cessation property relief U.K.

(1) A person may make a claim for post-cessation property relief if, after permanently ceasing to carry on a UK property business (whether carried on alone or in partnership)—

(a) the person makes a qualifying payment, or

(b) a qualifying event occurs in relation to a debt owed to the person,

and the payment is made, or the event occurs, within 7 years of that cessation.

(2) If the claim is made in respect of a payment, the claim is for the payment to be deducted in calculating the person's net income for the tax year in which the payment is made (see Step 2 of the calculation in section 23).

(3) If the claim is made in respect of an event, the claim is for the appropriate amount of the debt to be deducted in calculating the person's net income for the relevant tax year (see Step 2 of the calculation in section 23).

(4) The claim must be made on or before the first anniversary of the normal self-assessment filing date for the tax year for which the deduction is to be made.

(5) If—

(a) the person is a company within the charge to income tax under Chapter 3 of Part 3 of ITTOIA 2005 in respect of a UK property business, and

(b) the company ceases at any time to be within that tax charge in respect of the business,

the company is treated for the purposes of this section as permanently ceasing to carry on the business at that time.

(6) The following provisions apply for the purposes of post-cessation property relief as they apply for the purposes of post-cessation trade relief (but as if any reference to a trade were to a UK property business)—

(a) section 97 (meaning of “qualifying payment”),

(b) section 98 (meaning of “qualifying event” etc),

[F10 (ba) section 98A (denial of relief for tax-generated payments or events),]

(c) section 99 (reduction of relief for unpaid trade expenses), and

(d) section 100 (prohibition against double counting).

Textual Amendments

F10 S. 125(6)(ba) inserted (17.7.2012) (with effect in accordance with s. 9(6)-(8) of the amending Act) by Finance Act 2012 (c. 14), s. 9(4)

126 Treating excess post-cessation property relief as CGT loss U.K.

A person who cannot deduct all of an amount under a claim for post-cessation property relief may be able to treat the unused part as an allowable loss for capital gains tax purposes: see sections 261D and 261E of TCGA 1992.

Furnished holiday accommodation U.K.

127 UK furnished holiday lettings business treated as trade U.K.

(1) This section applies if, in a tax year, a person carries on a UK furnished holiday lettings business.

(2) “UK furnished holiday lettings business” means a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation (within the meaning of Chapter 6 of Part 3 of ITTOIA 2005).

(3) For the purposes of this Part (but as modified below) the person is treated instead as carrying on in the tax year a single trade—

(a) which consists of every commercial letting of furnished holiday accommodation comprised in the person's UK furnished holiday lettings business, and

(b) the profits of which are chargeable to income tax.

[F11 (3A) Chapter 2 applies as if sections 64 to 82 and 89 to 95 were omitted.]

(7) If there is a letting of accommodation only part of which is furnished holiday accommodation, just and reasonable apportionments are to be made for the purpose of determining what is comprised in the trade treated as carried on.

Textual Amendments

F11 S. 127(3A) substituted (19.7.2011) for s. 127(4)-(6) (with effect in accordance with Sch. 14 para. 4 of the amending Act) by Finance Act 2011 (c. 11), Sch. 14 para. 3(3)

Modifications etc. (not altering text)

C2 S. 127(1)-(3) modified (21.7.2009) by Finance Act 2009 (c. 10), Sch. 6 para. 2(5)

[F12 127ZA EEA furnished holiday lettings business treated as trade U.K.

(1) This section applies if, in a tax year, a person carries on an EEA furnished holiday lettings business.

(2) “EEA furnished holiday lettings business” means an overseas property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation (within the meaning of Chapter 6 of Part 3 of ITTOIA 2005) in one or more EEA states.

(3) For the purposes of this Part (but as modified below) the person is treated instead as carrying on in the tax year a single trade—

(a) which consists of every commercial letting of furnished holiday accommodation comprised in the person's EEA furnished holiday lettings business, and

(b) the profits of which are chargeable to income tax.

(4) Chapter 2 applies as if sections 64 to 82 and 89 to 95 were omitted.

(5) If there is a letting of accommodation only part of which is furnished holiday accommodation, just and reasonable apportionments are to be made for the purpose of determining what is comprised in the trade treated as carried on.]

Textual Amendments

F12 S. 127ZA inserted (19.7.2011) (with effect in accordance with Sch. 14 para. 4 of the amending Act) by Finance Act 2011 (c. 11), Sch. 14 para. 3(4)

[F13 Restrictions on relief U.K.

Textual Amendments

F13 S. 127A and cross-heading inserted (8.4.2010 with effect in accordance with s. 25(5)-(7) of the amending Act) by Finance Act 2010 (c. 13), s. 25(4)

127A No relief for tax-generated losses attributable to annual investment allowance U.K.

(1) This section applies if—

(a) in a tax year a person makes a loss in a UK property business or overseas property business (whether carried on alone or in partnership),

(b) the loss has a capital allowances connection (see section 123(2)), and

(c) the loss arises directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements.

(2) No property loss relief against general income may be given to the person for so much of the applicable amount of the loss as is attributable to an annual investment allowance.

(3) For the purposes of subsection (2), the applicable amount of the loss is to be treated as attributable to capital allowances before anything else and to an annual investment allowance before any other capital allowance.

(4) In subsection (1) “relevant tax avoidance arrangements” means arrangements—

(a) to which the person is a party, and

(b) the main purpose, or one of the main purposes, of which is being in a position to make use of an annual investment allowance in the obtaining of a reduction in tax liability by means of property loss relief against general income.

(5) In subsection (4) “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

(6) In this section “the applicable amount of the loss” has the meaning given by section 122.]

[F14 127B No relief for tax-generated agricultural expenses U.K.

(1) This section applies if—

(a) in a tax year a person makes a loss in a UK property business or overseas property business (whether carried on alone or in partnership),

(b) the business has a relevant agricultural connection for the purposes of section 120 (see section 123(3) to (7)), and

(c) any allowable agricultural expenses deducted in calculating the loss arise directly or indirectly in consequence of, or otherwise in connection with, relevant tax avoidance arrangements.

(2) No property loss relief against general income may be given to the person for so much of the applicable amount of the loss as is attributable to expenses falling within subsection (1)(c).

(3) For the purposes of subsection (2), the applicable amount of the loss is to be treated as attributable to expenses falling within subsection (1)(c) before anything else.

(4) In subsection (1) “relevant tax avoidance arrangements” means arrangements—

(a) to which the person is a party, and

(b) the main purpose, or one of the main purposes, of which is the obtaining of a reduction in tax liability by means of property loss relief against general income.

(5) In subsection (4) “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

(6) In this section “the applicable amount of the loss” has the meaning given by section 122 and “allowable agricultural expenses” has the meaning given by section 123.]

Textual Amendments

F14 S. 127B inserted (17.7.2012) (with effect in accordance with s. 10(5)-(7) of the amending Act) by Finance Act 2012 (c. 14), s. 10(4)

[F15 127BA Restriction of relief: cash basis U.K.

(1) This section applies if—

(a) in a tax year a person makes a loss in a UK property business or overseas property business (whether carried on alone or in partnership), and

(b) the profits of the business are calculated on the cash basis for the tax year (see section 271D of ITTOIA 2005).

(2) No property loss relief against general income may be given to the person for the loss.]

Textual Amendments

F15 S. 127BA inserted (with effect in accordance with Sch. 2 para. 64 of the amending Act) by Finance (No. 2) Act 2017 (c. 32), Sch. 2 para. 62(3)

[F16 127C Excess loss allocation to partners who are individuals U.K.

(1) Subsection (2) applies if—

(a) in a tax year, an individual (“A”) makes a loss in a UK property business or an overseas property business as a partner in a firm, and

(b) A's loss arises, wholly or partly—

(i) directly or indirectly in consequence of, or

(ii) otherwise in connection with,

relevant tax avoidance arrangements.

(2) No relevant loss relief may be given to A for A's loss.

(3) In subsection (1)(b) “relevant tax avoidance arrangements” means arrangements—

(a) to which A is party, and

(b) the main purpose, or one of the main purposes, of which is to secure that losses of a UK property business or an overseas property business are allocated, or otherwise arise, in whole or in part to A, rather than a person who is not an individual, with a view to A obtaining relevant loss relief.

(4) In subsection (3)(b) references to A include references to A and other individuals.

(5) For the purposes of subsection (3)(b) it does not matter if the person who is not an individual is not a partner in the firm or is unknown or does not exist.

(6) In this section—

• “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), and

• “relevant loss relief” means relief under section 118 (carry-forward property loss relief) or section 120 (property loss relief against general income).]

Textual Amendments

F16 S. 127C inserted (with effect in accordance with Sch. 17 para. 14 of the amending Act) by Finance Act 2014 (c. 26), Sch. 17 para. 9(3)