An individual’s rental loss is carried forward automatically and set against future profits of the same property business, for as long as that business continues (sections 118 and 119 of the Income Tax Act 2007). Only the part of a loss that comes from net capital allowances, or from certain expenses of an agricultural estate, can be set sideways against other income, and then only in the year of the loss or the next year. UK and overseas lettings are separate businesses with separate loss pools.

How is a rental loss carried forward?

Section 118 ITA 2007 gives relief to anyone who makes a loss in a UK property business or an overseas property business. The loss is deducted from profits of that business in later tax years, and section 119 sets the order: the next year’s profits first, then the following year’s, and so on until it is used. HMRC’s Property Income Manual at PIM4210 confirms that no claim is needed and the loss runs on indefinitely while the business continues.

Three features of the carry forward catch people out:

  • First available profits. The loss is set against the next profits of the business, even if those profits would otherwise be covered by the personal allowance. There is no option to save it for a year with a higher tax rate. Section 118(4) also requires brought forward losses to be deducted before any other relief against those profits.
  • Same business only. The loss can be set against profits of that property business, never against employment, self employment, pension or savings income in a later year.
  • Cessation. If the letting business stops, unused losses fall away. If the owner starts letting again after a gap, whether this is the same business resumed or a new one depends on the facts (PIM2500); losses of an old business cannot be used against a new one.

Because all of a person’s UK lettings form one UK property business (PIM1020), a loss on one property is automatically set against profits on another in the same year before any loss is carried forward.

Can a rental loss be set against other income?

Only in limited cases. Section 120 allows a claim for property loss relief against general income if the loss has a “capital allowances connection” or the business has a “relevant agricultural connection”. The amount that can go sideways, called the applicable amount in section 122, is the lower of the loss and:

  • the net capital allowances, meaning capital allowances less any balancing charges, ignoring structures and buildings allowances (section 123(2A)); and
  • allowable agricultural expenses of maintenance, repairs, insurance or management of an agricultural estate, excluding loan interest (section 123(5)).

The claim can be for the tax year of the loss or the following year, with any unused part claimed for the other year. A property loss cannot be carried back. PIM4220 explains that the claim is all or nothing: relief is taken up to the full amount of general income, so it can waste personal allowances. The claim must be made within one year after the normal Self Assessment filing date for the year specified, so a claim for 2026 to 2027 is due by 31 January 2029 (section 124). Anything not relieved sideways is carried forward under section 118.

Further restrictions apply. Section 24A caps the total of certain reliefs against general income (see cap on income tax reliefs). Section 127A denies sideways relief for losses from the annual investment allowance where arrangements were made mainly to get that relief, and section 127BA denies sideways relief altogether for a loss calculated on the cash basis (see cash basis vs accruals).

In practice, sideways relief is mostly relevant to commercial lettings and agricultural estates. Section 35 of the Capital Allowances Act 2001 bars capital allowances on plant for use in a dwelling house, so ordinary residential lettings rarely have a capital allowances connection. One exception is a former furnished holiday letting whose capital allowance pool was carried into the property business when that regime ended (see furnished holiday lettings after abolition).

Illustration only. A landlord of a commercial unit makes a £20,000 loss in 2026 to 2027, after £15,000 of capital allowances and no balancing charges. Up to £15,000 can be claimed against general income of 2026 to 2027 or 2027 to 2028. The other £5,000 is carried forward against future profits of the property business.

Why do UK and overseas lettings need separate loss pools?

Statute treats a UK property business and an overseas property business as separate businesses (PIM1020, PIM4210). All overseas lettings are pooled into one overseas property business, and all UK lettings into one UK property business, but a loss in one cannot be set against profits of the other in the same or a later year.

The same separation applies to lettings carried on in a different capacity. A partnership’s property business is separate from a partner’s own lettings, and a loss on one cannot be set against the other (PIM1035). Since 6 April 2025, a person who claims relief under the foreign income and gains regime for a year cannot claim relief for overseas property losses for that year, and any overseas property losses carried forward are treated as nil (PIM4205, section 845C ITTOIA 2005).

Former furnished holiday letting losses are no longer ring fenced. Unused UK holiday letting losses at 5 April 2025 were moved into the UK property business, and EEA ones into the overseas property business, by paragraph 16 of Schedule 5 to the Finance Act 2025.

What if a property is let below market rent?

All the loss rules assume commercial letting. PIM2130 explains that where a property is let at less than a commercial rent, for example to a relative, its expenses can be deducted only up to the rent from that property. It produces neither profit nor loss, and the excess expenses cannot be carried forward. A property occupied rent free is outside the property income rules entirely. Where a property is let commercially for part of the year and used by family for the rest, expenses are apportioned.

How do mortgage interest and finance costs affect a loss?

For individuals, finance costs on residential property are not deducted in working out the profit or loss. Relief is given as a basic rate tax reduction instead, so mortgage interest cannot create or increase a rental loss. Where the reduction cannot be used in full because the property profit is too small, PIM2058 explains that the unrelieved amount is carried forward to the next tax year as a separate amount. A landlord can therefore have both a property loss and unrelieved finance costs carried forward at the same time. See landlord mortgage interest relief.

How do companies use property losses?

Companies are much better placed. Under section 62 of the Corporation Tax Act 2010 a UK property business loss is first set against the company’s total profits of the same accounting period. Any excess can be surrendered as group relief, or carried forward and set against total profits of later periods on a claim, provided the company still carries on the UK property business (PIM4235, PIM4236). Overseas property business losses can only be carried forward against future profits of the same overseas property business (section 66). Losses from a business not run on a commercial basis are excluded, and on cessation unused losses are lost unless the company is an investment company, in which case they become management expenses.

What are the common mistakes?

  • Setting a residential rental loss against salary or trading income.
  • Netting an overseas rental loss against UK rental profits, or a personal loss against a partnership share.
  • Including mortgage interest in an individual’s rental loss.
  • Claiming only part of a sideways loss, or claiming after the deadline.
  • Carrying forward losses from a letting to family at a low rent.
  • Assuming losses survive a break in letting, when a new business started after the old one ceased cannot use them.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.