The Covid-19 pandemic has caused financial hardship for many and the need to release funds may lead to a decision to sell a buy-to let or second property. While the temporary increase in the residential SDLT threshold may give the property market a boost, it is still possible that the sale of the property may result in a loss.
Where a loss is realised, how can this be used?
No private residence relief means loss is an allowable loss
Investment properties and those which have never been an only or main residence do not benefit from private residence relief. While any gain on the sale of a property that has been the taxpayer’s main residence throughout the period of ownership is covered by private residence relief, the flip side is that if the main residence is sold at a loss, the loss is not an allowable loss for capital gains tax purposes. By contrast, the realisation of a loss on a property that does not benefit from full private residence relief is an allowable loss.
Chargeable gains in same tax year?
Capital gains tax is charged on net gains (chargeable gains less allowable losses) in the tax year after deducting the annual exempt amount. Thus, if the taxpayer realises any gains in the same tax year as that in which the loss arises, the loss must be set against those gains before applying the annual exempt amount.
Tony owns a number of rental properties. To help him survive the Covid-19 pandemic, he sells two properties in 2020/21, realising a gain of £20,000 on one property and a loss of £15,000 on the other. He also sells some shares realising a gain of £500.
He must set the loss of £15,000 against his gains of £20,500 for the year, leaving him with net chargeable gains of £5,500. This is covered by his annual exempt amount of £12,300, so he has no tax to pay. The balance of his annual exempt amount is lost.
Unfortunately, he cannot set the gains against the annual exempt amount first to reduce gains £8,200 and use only £8,200 of the loss, leaving the balance to set against other gains.
Carrying loss forward
If there are no gains in the year or the loss exceeds other gains in the tax year, the loss (or any unused balance) can be carried forward. This can be useful as the loss only needs to be set against gains in the same tax year in the first instance. Where a loss is brought forward, the taxpayer can choose how much of the loss is used, so that the annual exempt amount is not lost.
Tim sold a buy-to-let property in March 2020, realising a loss of £12,000. He makes no gains in the 2019/20 tax year, so carries the loss forward.
In July 2020, he sells another property realising a gain of £16,000. This is his only disposal in 2020/21. The annual exempt amount for 2020/21 is £12,300.
Tim uses £3,700 of the loss to reduce the gain to the annual exempt amount of £12,300, carrying the balance of £8,300 forward to set against future gains.
Where a gain is to be realised, delaying the sale so that it does not fall in the same tax year as the loss may be beneficial.
Report the loss
To make sure that the loss is not lost, it must be claimed. This is done by reporting it on the self-assessment tax return. This should be done within four years of the end of the tax year in which the asset giving rise to the loss was sold.
Partner note: TCGA 1992, ss. 15, 16.
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