How can I offset property losses against other income?

Owning a rental property can be profitable in the long term, but not every tax year produces a gain. Repairs, maintenance, and mortgage interest often exceed the rent received, creating a property loss. Many landlords want to know if they can use that loss to reduce their overall tax bill by offsetting it against other income such as salary or self-employed profits. The answer depends on how the property is used and the type of rental activity involved.

Understanding property losses

A property loss occurs when allowable expenses exceed rental income in a given tax year. Allowable expenses are costs that are wholly and exclusively for the purpose of letting the property. These include:

• Letting agent fees

• Repairs and maintenance

• Mortgage interest (restricted to a tax credit for individuals)

• Property insurance

• Council tax, utilities, or ground rent paid by the landlord

• Professional fees such as accounting or legal services

If your total expenses are higher than your rent received, you make a loss. For example, if you receive £10,000 in rent but spend £12,000 on mortgage interest and repairs, your property loss for the year is £2,000.

The standard rule: carry losses forward

For most residential landlords, HMRC only allows property losses to be carried forward and offset against future property profits from the same type of rental activity. This means you cannot usually offset your property loss against employment income or other types of profit in the same year.

Using the earlier example, if you make a £2,000 loss this year but earn a £3,000 profit next year, you can offset the £2,000 loss and only pay tax on the £1,000 balance.

This rule applies to most individuals with standard residential lettings, whether you own one property or several. It ensures that property losses reduce future rental profits but do not lower tax due on unrelated income such as salary, dividends, or pensions.

When you can offset losses against other income

There are limited exceptions where property losses can be used to reduce other taxable income in the same year. These situations are uncommon but valuable to understand.

Furnished holiday lets (FHLs)

If your property qualifies as a furnished holiday let, it is treated as a trading business rather than an investment. Losses from an FHL can therefore be offset against other income from the same tax year, such as employment or self-employment income.

To qualify, your property must:

• Be available to let for at least 210 days per year

• Be actually let for at least 105 days per year

• Be furnished to a standard suitable for holiday accommodation

• Be located in the UK or European Economic Area

If these conditions are met, your FHL is treated as a trade, allowing losses to offset other income and reduce your overall tax bill. However, you must apply the losses to the same type of activity first. For example, FHL losses from a UK property can only offset UK FHL profits or other UK income.

Early years of letting (pre-letting expenditure)

In some cases, expenses incurred before the property was first let can be treated as if they occurred on the first day of letting. This can create a loss in the first year that carries forward to future rental profits. Although these losses cannot offset other income directly, including them in your first-year accounts ensures you get future benefit once the property becomes profitable.

Property businesses run through a company

If you operate a property business through a limited company, the treatment is different. A company can usually offset property losses against other forms of income within the company, such as trading or investment income.

For instance, if your company earns £10,000 in consultancy income but makes a £3,000 property loss, you can offset the loss against that other income, leaving £7,000 taxable profit. The rules are more flexible because Corporation Tax applies to overall company profits rather than distinct income streams.

How to claim or carry forward losses

If you are an individual landlord, HMRC automatically carries forward your property losses once you declare them in your Self Assessment tax return. You must include them in the property pages and keep a record of the amount to apply against future years’ profits.

When you finally make a profit, you will see a box in the return to bring forward previous losses. You cannot choose to skip a year or apply only part of the loss HMRC requires that carried-forward losses are used as soon as possible against the first available property profit.

For companies, property losses are reported in the Corporation Tax return and offset automatically against total income for the period or carried forward, depending on the circumstances.

Keeping accurate records

HMRC expects detailed records to support any claim for property losses. Keep the following:

• Rent received and dates paid

• Invoices for all expenses claimed

• Bank statements showing payments

• Proof of any periods when the property was empty but available to let

• Loan or mortgage statements showing interest charges

These documents support your loss calculation and provide evidence in case of an HMRC enquiry. Losses without proper documentation can be disallowed, increasing your tax bill later.

How mortgage interest affects losses

Since April 2020, mortgage interest can no longer be deducted in full from property income for individual landlords. Instead, it is replaced by a 20% tax credit applied after calculating taxable profit. This change means mortgage interest no longer creates or increases a property loss for individuals.

However, companies are not affected by this restriction and can still deduct full mortgage interest as a business expense, making losses more likely within a company structure.

Example of carrying forward a property loss

Suppose you have a rental income of £12,000 and allowable expenses of £15,000 in 2024–25, giving a £3,000 loss. You report this in your Self Assessment. In 2025–26, your property earns £5,000 profit. You can apply the £3,000 carried-forward loss to reduce the taxable amount to £2,000.

If your profit in 2025–26 were only £2,000, the unused £1,000 loss would continue to carry forward to the next year. This process continues until all losses are used.

Strategic considerations

For landlords with growing portfolios, tracking carried-forward losses can become valuable for long-term tax efficiency. If you plan to expand or expect profits in future years, these losses can reduce taxable income later on.

If you are considering incorporating your property business, remember that losses carried forward personally do not transfer automatically to the company. You would effectively start from zero within the new entity, so it may be worth using personal losses first before transferring ownership.

When to seek professional advice

If you have large or ongoing property losses, or if your rental activity involves furnished holiday lets, short-term lets, or mixed-use properties, it’s wise to consult a tax adviser. They can help you determine whether your losses qualify for offset, ensure compliance with HMRC, and identify the most tax-efficient structure for your property business.

Conclusion

You cannot usually offset property losses against other income such as salary or self-employment earnings unless your property qualifies as a furnished holiday let or is held through a limited company. For most landlords, losses must be carried forward to reduce future rental profits from the same property business.

By keeping accurate records, claiming all allowable expenses, and understanding when exceptions apply, you can make sure property losses work to your advantage over time. Careful tax planning and professional advice can turn short-term losses into long-term savings.