Losses Are Not Lost! One day your renovations could turn into tax free income
It’s been a few years since the major changes in tax rules for furnished holiday lets which removed some of the best tax benefits including the ability to offset losses against other income and get a refund. This was a fabulous benefit for higher rate taxpayers, particularly those on PAYE with very liitle opportunity for tax mitigation.
Nowadays losses can only be used against the same business, not even buy to let profit you might have which means that even if you have no mortgage you are not likely to generate enough profit to use up the losses incurred by any major renovations or in fitting and furnishing a new property.
Of course many of our owners have mortgages which mean that they don’t make much of a profit or even lose money every year before any major expenditure so they are generating losses which can’t be used.
These losses are not lost however! They are carried forward to the next year and continue accumulating forever until you make a profit on the property. Not much help you might think but actually at some point in the future this could allow you to earn tax free income from the property.
Let’s imagine you bought a property for £300k with a £200k mortgage and spent £40k on renovations and £15k on furnishings and fittings. Add in mortgage interest other expenses and a limited rental income in the first year due to the work and you could easily end up with a loss of £70k for accounting purposes in the first year.
This figure is carried forward to the next year and further losses are added and carried forward every year until there is a profit. It’s easy to see a situation where accumulated losses in 10 years time were 100k or more.
The positive way of looking at this is that the first £100k of income from your holiday cottage will be tax free- you may retire and use your pension lump sum to pay off the mortgage, sell another property or just knuckle down with the repayments but once the mortgage is much lower or paid off and as rental income rises profit will follow and you’ll be able to keep all of it, even if you’re a higher rate taxpayer. This could form part of a retirement plan or fund activities when the kids have left home, as long as you keep the property or own any other holiday let the losses will be there to use forever.
Finally with that in mind don’t forget it’s still worth maximising your losses-
- Travel expenses- all those business trips to oversee the work at 45p/mile
- Capital items such as furnishings are written down at 100% nowadays
- If you can transfer any borrowing to the holiday let from your main home then do so
- Subsistence- if you are on site for a few days overseeing work then you have to eat!
Please note all this is just general comment and you should speak to your accountant or financial advisor for full information.