Rental Losses Explained
A rental loss occurs when the expenses you are allowed to claim on a property outweigh the rental income you receive. This is a common situation for landlords, especially in the early years of owning or improving a property, when costs can be high compared to rental earnings.
Importantly, these losses cannot be used to reduce your salary or other types of income. Instead, they must be carried forward and applied only against future rental profits from the same property business. This rule ensures that rental activities are treated separately from other forms of income for tax purposes.
It is also worth noting that HMRC views UK properties and overseas properties as two distinct businesses. Losses from one cannot be used to offset profits from the other. In addition, rental losses cannot be used to reduce any Capital Gains Tax liability when you eventually sell the property.
What Counts as Taking a Loss?
Being “in loss” as a landlord occurs when your allowable rental expenses — such as repairs, insurance, letting fees, and other property-related costs — are greater than the rental income you receive within a given tax year (6 April to 5 April). In simple terms, if it costs you more to maintain and manage the property than the rent you bring in, you are considered to have made a rental loss.
For example, imagine you collected rent received of £8,000 over the year. During the same period, your expenses, including insurance, agent fees, and essential repairs, amounted to 9,500. This means that instead of making a profit, you end up with a result of a £1,500 rental loss for that tax year.
These losses are not wasted; they carry forward to be used against future rental profits from the same property business, but they cannot be offset against other types of income or used to reduce Capital Gains Tax when the property is sold.
HMRC’s Rules on Rental Losses
Understanding how HMRC treats rental losses is crucial for landlords. The rules differ depending on whether your properties are in the UK or overseas, and they also set clear limits on how and when losses can be used. Below we expand on the key points you need to know.
UK Properties
All UK rental properties you own are treated as one single property business for tax purposes. This means that if you make a loss on one UK property, you can use that loss to offset profits from another UK property in the same year. For example, if you lose £2,000 on a flat in Manchester but earn £3,000 profit from a house in London, the loss reduces your taxable profit to just £1,000 overall. This system provides some flexibility and helps smooth out variations across your portfolio.
Overseas Properties
Unlike UK properties, overseas rental properties are treated as a completely separate property business by HMRC. This means you cannot mix profits and losses between your UK and overseas portfolios. If you have a rental property in Spain that makes a loss, you can only carry those losses forward against future profits from that same overseas property business — not against any UK rental profits. This separation often surprises landlords and requires careful tracking to avoid mistakes in your tax return.
No Offset Against Salary or Other Income
One of the most important limitations is that rental losses cannot be set against other types of income. That means you cannot use them to reduce your PAYE salary, dividends from investments, or profits from self-employment. For instance, if you earn £40,000 in salary and suffer a £5,000 rental loss, your tax liability on your salary remains unchanged. The loss can only be carried forward and used to reduce rental profits in future years from the same property business.
Expiry of Losses
Carried-forward rental losses remain available indefinitely — but only while you continue to run a property rental business. If you sell your last property and stop being a landlord, any unused losses will lapse and can no longer be claimed. This means it’s important to plan ahead if you’re considering exiting the rental market, as you may lose the benefit of years’ worth of accumulated losses if they have not been used to offset profits before you stop trading.
How to Calculate a Rental Loss
Step 1: Work Out Your Rental Income
Your rental income is more than just the monthly rent you receive from tenants. It must also include any additional amounts you charge, such as parking fees, storage costs, or service charges. All of these payments form part of your total rental income for the year, and HMRC expects them to be included in your calculations.
Step 2: Deduct Allowable Expenses
Once you’ve established your income, the next step is to subtract your allowable expenses. These are the day-to-day costs of running and maintaining your property, but they do not include improvements that increase the property’s value.
- Repairs and maintenance (not improvements)
- Insurance
- Letting agent and accountancy fees
- Utilities or council tax you pay for the property
- Replacement of domestic items (appliances, carpets, furniture)
Note: Mortgage interest no longer counts as an allowable expense. Instead, landlords receive a basic rate tax credit of 20% of their mortgage interest payments. This adjustment significantly affects how profits and losses are calculated compared to earlier years.
Step 3: Profit or Loss
The final step is to work out whether your rental business has generated a profit or a loss. The calculation is straightforward:
Rental Income − Allowable Expenses = Profit (or Loss)
If the result is a positive figure, you have made a taxable profit. If the result is negative, you’ve incurred a rental loss for the year. For example, if your total rental income is £10,000 and your allowable expenses come to £11,500, your calculation would be:
£10,000 − £11,500 = −£1,500
In this case, you have made a £1,500 loss, which can be carried forward to offset future rental profits from the same property business. While this does not reduce your other income, it can still save you tax in future years when your properties are more profitable.
Carrying Forward Your Losses
One of the key features of rental losses is that they do not simply disappear at the end of the tax year. Instead, they are carried forward indefinitely until there are enough rental profits to offset them. This means that even if you experience several years of losses, they remain on record until you eventually generate a profit.
HMRC rules require that these carried-forward losses must be used against the first available rental profit. In other words, you cannot choose to “save” your losses for a later year when your profits may be higher — they are automatically applied as soon as profits arise. If you accumulate losses across multiple years, they are added together into one carried-forward balance.
How this works in practice:
2021/22: £2,000 loss
2022/23: £1,500 loss
Total carried forward at start of 2023/24 = £3,500
2023/24: £3,000 profit − £3,500 carried-forward losses = £0 taxable profit
Unrelieved balance carried into 2024/25 = £500
This example shows how multiple years of losses can be consolidated and gradually reduced as profits return. While the system ensures you eventually benefit from your earlier losses, it also highlights the importance of careful record-keeping and accurate reporting to HMRC year after year.
What You Can’t Do with Losses
You cannot use rental losses to reduce your income tax on employment income, pensions, or other earnings such as dividends or self-employment profits. These types of income are entirely separate from your rental business in HMRC’s eyes, so losses must remain ring-fenced for use only against future rental profits.
Rental losses also cannot be used to reduce any Capital Gains Tax liability when selling a property. Even if you have accumulated years of rental losses, they are disregarded when working out the gain on a sale — meaning you may still face a sizeable tax bill when disposing of a property.
Finally, you cannot offset UK rental losses against profits from overseas properties, or vice versa. Each is treated as its own separate property business, so the losses must stay within the same category when being carried forward.
Common Pitfalls
Capital vs. revenue expenses: Not all property-related costs qualify as allowable expenses. Replacing a broken boiler is treated as a repair and therefore deductible, but installing central heating where none previously existed counts as an improvement, which is not allowable. Understanding the difference is crucial to avoid overstating your losses.
Personal costs: Your own time managing the property is never deductible, nor are personal costs such as your mobile phone bill or general travel expenses. Only costs incurred wholly and exclusively for the rental business can be claimed.
Record-keeping: Landlords must keep receipts, invoices, and records of expenses for at least six years. HMRC may query your claims and request evidence, so having clear records is essential to defend your position and avoid penalties.
How to Check Your Carried-Forward Losses
If you’ve previously reported rental losses, it’s important to verify them to ensure they’re applied correctly in future tax years. The following steps show you where to find and confirm your carried-forward losses with HMRC.
Step 1: Look at Your Self Assessment (SA105)
Your SA105 form contains key figures for carried-forward losses. Box 26 shows the “Loss brought forward” from previous years, Box 27 lists the “Total loss for the year,” and Box 29 provides the “Loss to carry forward,” which is the amount available to offset rental profits in the next tax year. Carefully reviewing these boxes ensures you understand exactly how much loss is available and avoids mistakes when completing your next return.
Step 2: Check Your HMRC Online Account
You can also view your carried-forward losses via your HMRC online account. Log in, navigate to Self Assessment, and select “View your submitted returns” to download your return PDF. This provides a convenient digital reference and helps confirm the figures match your paper records. Regularly checking your online account can prevent discrepancies and ensure your records are up to date.
Step 3: If Not Recorded
If your carried-forward losses are not correctly recorded, you may need to recalculate them from last year’s rental income and allowable expenses. If necessary, you can amend your return, which is usually allowed within 12 months of the 31 January deadline. Taking the time to verify and correct any errors ensures you do not lose valuable tax relief that can be applied in future years.
Deadlines and Practical Tips
One of the most important considerations for landlords is staying on top of deadlines. Your Self Assessment must be filed by 31 January each year, even if you are reporting a rental loss. Missing this deadline can result in penalties, interest, or complications with carried-forward losses, so planning ahead and setting reminders well before the due date is essential.
Keeping detailed records is crucial. Using spreadsheets or accounting software to track rent received, allowable expenses, and any losses ensures that you have a clear record of your financial activity for each property. Accurate tracking not only simplifies filing but also makes it easier to verify figures if HMRC requests clarification.
It is also essential to maintain separate records for UK and overseas properties. Since HMRC treats these as distinct property businesses, mixing income and expenses between the two can lead to errors or rejected claims. By keeping organized, property-specific records, you ensure that your carried-forward losses and profits are correctly calculated, reducing the risk of mistakes and ensuring compliance with HMRC rules.
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