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Under the ‘Non-Resident Landlord Scheme’ (NRLS) where the deductible expenses exceed rental income for any quarter the excess expenses are:

carried back for offset against rental income paid to the same landlord for previous quarters in the same tax year, on a ‘last in, first out’ basis; then
carried forward for offset against future quarters’ net rental profits.

Repayments
Carry back will result in a repayment of tax for the previous quarter in the tax year – the amount can be deducted from any tax due for other NRLS lettings of the current quarter.

Should it not be possible to deduct the refund because it relates to a previous tax year, a claim to HMRC is required.

Example:
John has been working abroad for nine months and rents out his UK property via a letting agent. The letting agent pays all the expenses on his behalf, deducting them from the rent received.

The property is let at £800 per quarter. The expenses for the quarter to 31 March 2015 were £1,000 and for the quarter to 30 June 2015 were £1,400.

Tax year 2014/15    
Quarter to 30 December 2014    
                Profit                                      £800
                Tax                                        £160
Quarter to 31 March 2015    
                Rent                                       £800
                Less expenses                    £(1,000)
Carry back loss to previous quarter           £(200)
    Tax refund £200 @ 20%                         £40

Tax year 2015/16    
Quarter to 30 June 2015    
    Rent                                                    £800
    Less expenses                                 £(1,400)
    Excess expenses                                £(600)

The £(600) excess cannot be carried back to the previous quarter, as the quarter is not in the same tax year. Rather, it will be carried forward to be offset against future net profit (if the property remains rented). If the property ceases to be rented the excess cannot be used by the agent.

NOTE: The biggest expense is likely to be mortgage interest, which is not paid by the agent and therefore cannot be offset. Hence many NRLS landlords have to wait until the year-end to claim any refund due via submission of a Tax Return.SaveSave