Has your property income been affected by coronavirus?

What if my tenants haven’t been able to pay their rent?

Many people are struggling with household bills, so you might have found your tenants have had trouble paying their rent. The tax treatment of unpaid amounts depends on how you normally pay tax on your rental profits – that is, whether you use the cash basis or the accruals basis.

Cash basis

From 6 April 2017, if you are an individual and your total income from letting out property is no more than £150,000, by default you will normally work out your rental profits on the cash basis. However, if you prefer, you can elect on your tax return to work them out on the accruals basis instead (explained below).

The cash basis means that you take into account income (rent) that you have actually received from your tenant during the tax year, and you take off expenses you have actually paid out.

So if, for example, your tenant had trouble paying their March 2020 rent after the effects of coronavirus were first felt, you might have only received 11 months’ worth of rent in the 2019/20 tax year (which ended on 5 April 2020). You would only therefore pay tax on the amounts you had received before 5 April 2020.

Let’s say your tenant’s financial situation then improved in April or May 2020 – perhaps because they were able to access money from the government’s coronavirus support schemes – and they caught up with their rent payments then. This could mean that, although you received less rent in the 2019/20 tax year (11 months’ worth), you could end up receiving more than usual in the 2020/21 tax year (say, 13 months’ worth, all else being equal).

Bear in mind that this could mean that your tax payments are lower than expected for 2019/20 (final payment due by 31 January 2021) and then higher for 2020/21 (final payment due by 31 January 2022).

Note that if your rental profits for 2020/21 end up being very low, then you may be able to avoid having to complete a tax return for that year, or even paying any tax on that income. This might be the case, for example, if you only started letting the property towards the end of the tax year. See our main guidance for more information.

Accruals basis

Prior to 6 April 2017, rental profits were calculated on the accruals basis. You can still work them out this way if you elect to do so on your Self Assessment tax return.

This means that you are taxed on the amount of income you were due to receive during the tax year (after taking off any expenses which relate to the tax year, including those which may have been unpaid at 5 April).

In this situation, if your tenant does not pay their rent, you still have to include in your rental income the amount you were due to receive.

So, let’s say (as in the earlier example), your tenant does not pay their March 2020 rent until after the end of the tax year. In your 2019/20 tax return, you would still need to include the March rent when working out your rental profit.

This is unlikely to make too much difference to you if it is simply that your tenant is slow to pay for a month or two and then catches up with payments. But if it becomes clear that you are never going to recover the money you are owed, you might then be able to claim this as an expense against the rent – known as a ‘bad debt’.

What if I negotiate a rent holiday or rent reduction with my tenant?

If your tenant is struggling to pay their rent, you might perhaps ‘write off’ (agree not to charge them and not chase them for) rent for a certain period.

Under the cash basis, outlined above, you simply would not include the agreed amounts written off in your rental income, as you would never have received them.

Accounting for such amounts under the accruals basis could be a little more complicated. You might, for instance, include them in an earlier period if you were still expecting to receive them at that time and then deduct them as an expense in a later period as you would a bad debt. If, instead, you agreed in advance not to charge certain amounts of rent (or ‘waive’ such amounts), you would not include them as income in the first place as you would not have been expecting to receive them.

Always keep records of what has happened and what you have agreed with your tenant to back up the tax treatment you have adopted.

⚠️ Please note: we are not qualified to comment on the legal aspects of altering tenancy agreements and we recommend you take appropriate advice.

What if I make a loss on my rental property?

If you lose money (make a ‘loss’) from renting out a UK property – that is, your allowable expenses are more than your income – you may be able to take it off a profit from renting out another UK property, as generally all your rental income in the UK is treated as one ‘rental business’.

Similarly, any overseas properties which are let are treated as one overseas rental business. You cannot offset a loss from an overseas property against income from a UK property, or vice versa.

Note that if you have a furnished holiday let (FHL) and you incur a loss, then you can only offset this loss against future income from the same FHL business. However, a loss incurred in a normal UK property business may be offset against profits from a UK FHL business.

If you cannot use a loss in the tax year it arises, it will generally be carried forward to the next tax year and deducted against the profit for that year, if you make one.

Losses that are not used when you cease a property rental ‘business’ cannot be used against other income. Read on for more about cessations.

My tenant has moved out and I’m now thinking of selling my rental property instead of re-letting it. What tax issues do I need to think about?

There are a number of things to consider in this situation. Below we set out some of the typical points you might need to think about. Note, however, that these issues can be complicated, so we recommend you consider taking professional advice. At the end of this article, we point to our guidance on how to find someone to help you.

1. Is your property letting activity ceasing?

If your property rental business ceases – for example, you have only one property that you have rented out and you now intend to stop renting it and to sell it (or use it for another purpose, such as to live in yourself) – you will need to note the cessation on your Self Assessment tax return for the year in which you stop renting it.

Whether or not a rental business has ceased can make a difference if you have losses on property letting that you have not used up against profits. It is not possible to get relief for an unrelieved loss on cessation of a rental business, even if you start a new rental business.

However, it might be that your property rental business has not stopped – for example, if you are selling one property and intend to buy another with the proceeds to carry on renting out.

We recommend you read the guidance in HMRC’s Property Income Manual (PIM2510) on this subject if you are making changes to your property rental business which might mean that HMRC could consider it as having ceased.

2. Are you paying out costs after ceasing property letting?

In working out your final property income profit when you stop renting out property and your business has ceased, you should include all expenses that you incurred ‘wholly and exclusively’ relating to that business. For example, all costs relating to the tenant moving out and making good damage/cleaning and similar costs should be deductible against the final rental income.

However, if you are then intending to use the property for another purposes, such as to live in yourself or to sell and you incur costs after the tenant has moved out which improve the property, these are unlikely to be allowed against the rent as they cannot be argued to be wholly and exclusively relating to the rental business.

However, if the costs are of a capital nature they may instead be deductible as ‘enhancement expenditure’ in the capital gain calculation when you sell the property. For more information on enhancement expenditure, we recommend looking at HMRC’s Capital Gains Manual. We also publish further information on what kind of expenditure is allowable for a rental business in our main guidance.

Example

Harry rented out a single property for a few years. When his tenant leaves in June 2020, he decides to sell the house. Harry thinks that he will get more for the property when he sells it if he first refurbishes the bathroom. The amount he spends on refurbishing the bathroom for the purpose of enhancing the property’s sale value will not be deductible against the earlier rental income, but may be deductible in the capital gains calculation.

3. What capital gains tax might be due on sale of the property?

On disposing of a property that has been rented out, whether you sell it or, for example, give it away, capital gains tax needs to be considered. This means that you need to compare what you get for the property (or its market value) with what it cost you (or its value when you acquired it, for example if you inherited it) so see whether you have made a profit or loss over the time you have owned it.

If you have ever lived in the property yourself, part of the gain might be exempt from capital gains tax, as explained in our guidance.

4. Report capital gains and pay tax on them at the right time – you might only have 30 days!

It is very important to note that disposing of a UK residential property can mean that you have only 30 days from the date the sale completes to report the capital gain to HMRC and pay any tax that is due. See our guidance for a full explanation.

Where can I find more information?

You will find further information on our property income and capital gains tax pages.

If you need help from a professional tax adviser, see our getting help page for how to get advice on a paid basis. Some people with no means to pay for advice might be able to get help from one of the tax charities, or from HMRC.