Ensuring the maximum use of expenses incurred prior to the letting of a property
Submit Articles Back to Articles
15 March 2011
In the current
economic climate there are many property owners forced to let out
reason is perhaps because they cannot sell the property at the right
it is an elderly person moving into a care home or a second home that
let out or perhaps it is an entrepreneur wanting to start a property
Whatever the reasons
for the pre-letting costs that might be incurred by the property owner
achieve tax relief if these costs are structured properly. There are
advisers and their clients who do not think this to be the case.
From the tax year
1995/96, rents, whether they arise on just one or a number of
regardless of whether they are furnished or not, are treated for UK tax purposes as
relating to a single UK
business. The other change at that time is that in accordance with
s272, those profits are calculated much in the same way as trading
expenses are allowable if they are incurred ‘wholly and exclusively’
rental business. This is reiterated in HMRC’s Property Income Manual at
incurred within seven years
As such, expenses
incurred within seven years of the commencement of the letting, and in
accordance with these rules, should be deductible on the first day of
ITTOIA 2005, s 57. So any repairs carried out before the letting starts
still be deducted from the first year’s gross rents (see PIM2505).
and repair of an asset
By applying normal
trading rules, a revenue deduction is allowable for the repair of an
long as it is not the entirety that is ‘repaired’, but only a part of
asset, as stated by Buckley LJ in of Lurcott v Wakely
& Wheeler CA  1KB 905. Provided that there is
element of improvement then a replacement of these elements should
allowable against rents.
HMRC detail their
views on replacement at PIM2020, in the final few paragraphs, and
mention the replacement of a kitchen as an example. HMRC go on to say
where modern items are used (because the item being replaced may,
simply be no longer available or standard construction techniques and
have simply progressed) so long as it is the nearest modern equivalent
item replaced that is used, even though it may technically be an
they will still allow it as a revenue item; e.g. a double-glazed unit
a single-pane window.
Most repair work
involves replacing old defective parts with something new. However,
work carried out not only simply restores the defective item to what it
originally was, but also alters or improves it, then this amounts to an
of capital nature.
When rewiring the
electrical circuits, if better materials are used to create greater
enable the whole system to cope with more modern equipment, then the
costs will not be allowed.
When deciding whether
the replacement amounts to a revenue or capital expenditure, we must
what is the entirety. This is demonstrated by two decided cases: Bullcroft
Main Collieries Ltd v O’Grady
17 TC 93 and Samuel Jones & Co
(Devonvale) Ltd v CIR  32 TC 513.
Of particular concern
is HMRC’s statement in PIM2020 that expenditure is likely to be capital
nature when it relates to ‘a property acquired that wasn’t in a fit
use in the business until the repairs had been carried out or that
continue to be let without repairs being made shortly after
the concern that the work is required in order to achieve the required
price, that would give rise to a certain expectation of standards of
décor, all items of expenditure should be examined carefully to ensure
genuinely revenue in nature and would therefore be deductible.
For financing the
costs of the refurbishment or simply to withdraw funds for the client,
be achieved by raising a loan against the property. Regardless of the
purpose of the loan, all the loan interest would be allowable as a
against rents on any loan where the loan value is no greater than the
the property when first let out – see BIM45700, example 2. In addition,
debt would reduce the net inheritance tax value of the asset, which may
as an additional tax advantage.
There are clearly
ways to achieve tax relief on expenses incurred prior to letting out.
The expenditure incurred
prior to letting would therefore have to be wholly and exclusively
the purposes of the rental business and not capital in nature.
It must also be noted
that in certain circumstances, property business losses arising from
allowances may be set against general income. This clearly shows a
point for when this expenditure is incurred.
Prior to any property
being let out all the work that needs to be carried out must be
the estimates of cost must be set out and examined regularly on the
refurbishment and repair to be carried out so that maximum tax relief
achieved on not just the expenses but the finance associated therewith.
repair element must be split from the capital expenditure and a
planning review undertaken.
About the Author
Supplied by Julie
Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire,
01962 735544. Email;
Julie Butler F.C.A.
is the author of Tax Planning for Farm and Land
0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN:
0406966540. The third edition of Tax
Planning For Farm
and Land Diversification will be published shortly.
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2011-07-01 09:48:36 in Tax Articles