A rental loss is carried forward and set against future profits of the same property business. It normally cannot reduce tax on your wages. As at 17 October 2026, residential mortgage interest is carried forward separately, outside the loss.
You make a loss when your allowable costs are more than your rent. The rules are in sections 118 to 120 of the Income Tax Act 2007 and HMRC's Property Income Manual, checked on 17 October 2026.
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How a rental loss is used
| Situation | What happens to the loss |
|---|---|
| Next year your rentals make a profit | The loss comes off that profit first, automatically |
| You have a loss on one UK property and a profit on another | They are netted off, because all your UK lettings count as one business |
| You also let property abroad | Overseas profits and losses are kept separate from UK ones |
| You have a job or a trade as well | The loss normally cannot be set against that income |
| Part of the loss comes from capital allowances | That part can be set against your other income, for the loss year or the next |
| You let to family at a reduced rent | Costs are allowed only up to the rent, so there is no loss to use |
| Your rental business stops | Losses carried forward are usually lost |
HMRC's manual says the loss is carried forward "indefinitely until relief can be given", and that "no special claim is required". It also says losses "can't be carried forward after the property business ceases".
Mortgage interest is not part of the loss
For residential lets, mortgage interest is not deducted in working out your profit or loss. It earns a separate tax reduction, worked out on the lowest of your finance costs, your property profits after any losses brought forward, and your income above the personal allowance (leaving out savings and dividend income). In a loss year your property profit is nil, so there is no reduction that year, and GOV.UK says the unused interest is carried forward. You end up with two figures to carry: the rental loss and the unused interest.
A worked example
A landlord in England has 2 flats. In 2026-27 the rent is £14,000 and the allowable costs, mostly a large repair, are £17,000. Mortgage interest is £2,000 a year. In 2027-28 the rent is £14,500 and costs are £9,500.
| 2026-27 | 2027-28 | |
|---|---|---|
| Profit or loss before interest | £3,000 loss | £5,000 profit |
| Loss brought forward used | none | £3,000 |
| Taxable rental profit | nil | £2,000 |
| Loss carried forward | £3,000 | nil |
| Interest available (this year plus brought forward) | £2,000 | £4,000 |
| Interest used for the reduction | nil | £2,000 |
| Tax reduction | nil | £440 (22% of £2,000) |
| Unused interest carried forward | £2,000 | £2,000 |
The interest used in 2027-28 is capped at the £2,000 profit left after the loss. From 2027-28 property income in England and Northern Ireland has its own rates, and the reduction is given at the 22% property basic rate. The example assumes the landlord's other income is well above the personal allowance.
Stopping and starting again
GOV.UK says that if you continue the same property business and start renting again within 3 years, you may be able to claim earlier losses against profits from the new property, depending on the circumstances. HMRC's manual says whether the business ended is a question of fact. Its rule of thumb is that a gap of more than 3 years, with different properties let before and after, means the old business ended, so the old losses cannot be used. A shorter gap is not a guarantee either: the manual says other facts can point to the business ending, such as putting the sale money into a different venture first.
Losses in Making Tax Digital
Your quarterly updates show income and costs, not losses. GOV.UK says that after the year-end adjustments you complete your tax return by reporting any losses you have. HMRC's Individual Losses API lets software send brought-forward losses from before you joined Making Tax Digital (MTD), so your software needs the figure from your last Self Assessment return before you joined.
What this means for you
A loss is not wasted, but it only helps your rental business. Keep a running total of losses and unused interest from one year to the next, and check that each year's return uses them. If you are thinking of selling your only rental, any losses carried forward will usually go with it.
Steps to take if you have a rental loss
- Check the loss is real: costs must be allowable and the letting must be at a commercial rent.
- Leave mortgage interest out of the loss and record it separately.
- Write down the loss and any unused interest carried forward, with the tax year.
- Make sure next year's return sets the loss against your rental profit before anything else.
- If you claim capital allowances, check whether that part can go against your other income. The claim is due within a year of the 31 January filing date, so by 31 January 2029 for a 2026-27 loss, and a yearly cap on relief against other income applies.
- Check whether and when MTD applies to you with the free MTD check, and give your software your brought-forward figures before the first year-end.
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Questions people ask
Can I set my rental loss against my salary?
Normally no. GOV.UK says you can usually only set a rental loss against future profits of the same rental business. The exception is the part of a loss that comes from capital allowances, or certain agricultural costs, which can be set against your other income for the loss year or the next one.
Do I have to claim the loss to carry it forward?
No. HMRC's manual says the loss is carried forward automatically and no special claim is required. It is used against the first profits of the same business, and any part left over keeps rolling forward until it is used.
Does a loss on one rental cancel out profit on another?
Yes, for properties in the UK. GOV.UK says a loss from one property is automatically set against the profits from another. Overseas properties are a separate business, so their profits and losses are kept apart.
Does mortgage interest make my loss bigger?
No. Residential mortgage interest is not deducted in working out the profit or loss. It gives a separate tax reduction, and any interest that cannot be used because there is no profit is carried forward on its own.
What happens to my losses if I sell my only rental?
GOV.UK says losses carried forward are usually lost when the rental business ends, because they cannot be set against other income. If the same business carries on and you start letting again within 3 years, you may be able to use them, depending on the facts.
Can I make a loss by letting to my family at a low rent?
No. GOV.UK says relief for losses is only given when the loss comes from commercial letting. With a reduced rent to a friend or relative, costs are allowed only up to the rent, so there is no profit and no loss.
Sources
- Work out your rental income when you let property (GOV.UK)
- PIM4205: Losses for income tax: general (HMRC Property Income Manual)
- PIM4210: Setting losses against future profits (HMRC Property Income Manual)
- PIM4220: Setting losses against general income (HMRC Property Income Manual)
- PIM4222: How relief is given against general income (HMRC Property Income Manual)
- PIM2510: Beginning and end of a property business: cessation (HMRC Property Income Manual)
- Income Tax Act 2007, section 118: carry forward against subsequent property business profits (legislation.gov.uk)
- Income Tax Act 2007, section 120: deduction of property losses from general income (legislation.gov.uk)
- Restricting finance cost relief for individual landlords: how it is worked out (GOV.UK)
- Use Making Tax Digital for Income Tax: adjust your self-employment and property income (GOV.UK)
- Individual Losses (MTD) API (HMRC Developer Hub)
- Finance Act 2026, section 7: property rates of income tax for 2027-28 (legislation.gov.uk)
This is general information to help you understand the rules. It isn't tailored to your circumstances, so check your own position before acting on it.
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