Normally, any expenditure incurred on a letting property cannot be included in the profits of the rental business before the let of that property has begun. However, there are exceptions to this rule. It is possible to deduct “pre-letting” expenditure which has been incurred within seven years before the start date of a business.
Relief is only allowable under these special rules where:
- The expenditure is not otherwise allowable as a deduction of the rental business (i.e. against other income or capital gain);
- The expenditure would have been allowed as a deduction if it had been incurred after the rental business started (i.e. the expenditure must be incurred wholly and exclusively for the purpose of the rental business).
How does it work?
If the conditions above are satisfied, the expenditure would be deemed to have been incurred on the first day of let and added to other allowable letting expenses incurred during the tax year. This total amount is then deducted from the total letting receipts for that year.
- Costs incurred in relation to the actual purchase of the property, including legal fees, solicitor fees are capital costs and are allowed to be deducted against the proceeds of the eventual disposal of property under the capital gains tax rules.
- The special rules would be restricted where a landlord who previously lived in the property as his/her main residence as it would be hard to argue that the work has been carried out “wholly and exclusively” for letting purposes.
The repairs and maintenance costs incurred before the property is first let may be treated as allowable letting expenses provided certain conditions are met:
- The cost is for the replacement of worn or dilapidated items.
- The property was in a fit state of repair for use in the letting business prior to it being actually let.
- The price paid for the property was not substantially reduced to take into account the dilapidated state of repair.
- The purchase price, if reduced, was reduced only to take into account ‘normal wear and tear’.
Therefore, it may be useful to obtain some evidence, like photographs or keeping the surveyor’s report to show that the property was in a “fit state of repair” before the repairs undertaken.
Contract us if you wish to discuss above further.