Property income - post cessation expenses

Property income - post cessation expenses

Didn't find your answer?

Hi.  I am trying to work out from first principles whether and how relief might be available for post cessation expenses in the following situation:
A single-property UK residential unfurnished letting activity ceases on (say) 05 April 2014 when vacated by the tenant. There is no intention to continue.

The tenant trashed the place before leaving, resulting in substantial repairs expenditure in May 2014.  The loss is uninsured.

Ignore, for this purpose, the contentious issue of the abolition of renewals basis and take it as read that the expenditure was of a nature which, had it been undertaken during a continuing letting business, would have been allowable.

So, the security deposit is retained, to match some of the costs, but that is not sufficient to cover the costs.  The tenant has disappeared and there is no realistic prospect of recovery from the tenant, although in law there would be good grounds for a claim.

One possible option might be to accrue for the repairs expenditure at 05 April 2014.  Since 1994-95 the accounting principles for preparation of rental property profits has been brought into line with trading activities.  It would not be a general provision (and hence disallowable on those grounds) being a specifically calculated amount.

Another option might be to claim relief under s.125 ITA 2007 in 2014-15.  Going down this route there is some doubt in my mind which heading of "qualifying payment" (s.97) or "qualifying event" (s.98) might be appropriate.  There might be an argument for either.  In favour of "qualifying event", the expenditure might be regarded as an unrecoverable debt due from the tenant.  In favour of "qualifying payment", it might qualify under purpose "A":  The product being supplied is the availability of a property for occupation as a residence.  That property is defective and the expenditure is to make good that defect.  The fact that it is defective by reason of action taken by the tenant is not discussed in s.97 as relevant (although I suspect that the draughtsmen intended that the defect should be caused by the "trader").

So, I am interested in opinions regarding whether there is any hope for relief and, if so, the relative prospects for success under the routes suggested above (or any other method that I have not considered).

For what it is worth, to save anyone hunting, HMRC commentary is in PIM2510.  There is a brief but very uninformative paragraph on post cessation expenses where there are no corresponding post cessation receipts.  I did not find it helpful.

With kind regards

Clint Westwood

Replies (6)

Please login or register to join the discussion.

By Steve Kesby
08th Oct 2014 13:15

The notional property business

I don't think a specific provision helps you.

Whether a provision is general or specific it a trite HMRC argument. If a provision has been correctly made as a matter of GAAP.

A provision cannot be made as a matter of GAAP unless, at the balance sheet date, there is a present (legal or constructive) obligation to incur the expenditure. I don't think there is.

I don't think you can claim relief under s. 125, because s. 97 essentially deals with claims in relation to historic supplies (s. 97(2)(a) - goods supplied, work done, services provided - all past tense) and s. 98 deals with events in relation to debts that have been brought into account [ie as income] in calculating the profits of the [business] (s. 98(2)(a) and s. 98(5)(a)).

However, I believe that HMRC thinking is faulty.

There is no cessation, as such, because of the deeming provisions in ITTOIA 2005, s. 264 and 265 That deem there to be a single property business. In relation to UK properties, s. 264 says that:

"A person's UK property business consists of:

every business which the person carries on for generating income from land in the United Kingdom, andevery transaction which the person enters into for that purpose otherwise than in the course of such a business."

The legislation on farming is similarly drafted (ITTOIA 2005, s. 9(2)), and it has been held that two farms separated geographically were one trade (Bispham v Eardiston Farming Co 40 TC 322). Despite HMRC's assertions to the contrary, there is nothing within these deeming provisions that says that businesses occurring at different points in time are not also part of the same overarching deemed business.

Specifically though a transaction that involves incurring expense on repairs that occurs after an individual business for generating income from land has ended are deemed to be part of the same business, in my view.

Thanks (0)
avatar
By King_Maker
08th Oct 2014 13:41

I don't think the Post Cessation Expenses regime will assist here.

Will the work be done even if no tax relief is available?

 

Thanks (0)
avatar
By nogammonsinanundoubledgame
08th Oct 2014 15:26

Thanks
@ King_Maker
I sort of suspected as much. More of a wing and a prayer. But if no prayer, so be it. It was always going to be something of a stretch.
The work has already been done, so yes, regardless of whether or not tax relief is available. It had to be done, unless proposing to sell at a heck of a discount.

@ Steve
Thanks, somewhat as expected. But I am confused by the latter part of your post, wherein you seem to opine at the possibility of a continuing business. The tenant left on 05 April 2014. There are no plans to replace him. There is no other let property. Are you saying that the rental business actually ceased on the completion of the repairs expenditure? That would not really help us of course, because there would be no way to enjoy relief for the resulting 2014-15 loss (except via s.125, which I thought was likely a non-starter).

The reality is that by 05 April 2014 the landlord had suffered an economic loss, and the measure of that loss is the expenditure subsequently defrayed in restoring the property. The question is whether there is any way under GAAP to recognise that loss in the period in which it is actually sustained, in a manner that qualifies for IT relief in that year. A simple downward valuation of the property would not qualify, as the property is not trading stock as such, but a capital asset.

Perhaps what he should have done is gone into the property on 05 April 2014, noticed its state, and immediately contracted with a repair company.

With kind regards

Clint Westwood

Thanks (0)
By Steve Kesby
08th Oct 2014 15:48

I'm saying that there's no cessation...

... and that that's just an HMRC myth. It is a fact that there was no income or expenditure of the deemed overarching property business after May 2014.

If you ask your client, you might even find that during May they had intended to find a new tenant and carry on the business, but decided against this course of action in June or July.

Have you ever seen ITTOIA 2005, s. 275? :)

Thanks (1)
avatar
By King_Maker
08th Oct 2014 15:42

Clint W - as the work has been done, I would be inclined to include the amount in the cessation accounts with a commentary in the white space.

It would seem that the balance over the deposit might be debt due from the tenant.

Did you have any problems getting  the deposit from the relevant Protection scheme?

 

Thanks (0)
avatar
By nogammonsinanundoubledgame
08th Oct 2014 17:57

s.275
I hadn't actually. Or not for a long time. Totally slipped my mind. What a nice solution. Thanks

With kind regards

Clint Westwood

Thanks (0)