rental property, pre letting costs

rental property, pre letting costs

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Client’s mother died January 2013.

Client inherited all the estate including a flat.

The flat was redecorated etc in readiness for letting.

Letting commenced November 2014 and the new tenant took over paying the council tax from then.

Per PIM2505 an expense prior to the letting will be allowable if it "would have been allowed as a deduction if it had been incurred after the rental business started."

Council tax would be allowed if the landlord paid it after the letting started so we assume council tax paid by the client from January 2013 to November 2014 will be allowable on day 1 of the letting as a "pre trading" cost.

Would you agree?

Replies (21)

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By User deleted
05th Sep 2015 11:42

Agree if:

nobody lived there before, andthe flat is used only for the property business

As an aside, if the property was empty shouldn't the council tax exemption/discount apply?

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Replying to Tax Dragon:
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By User deleted
05th Sep 2015 12:29

Suspect

taxguru wrote:

As an aside, if the property was empty shouldn't the council tax exemption/discount apply?

I suspect most authorities (ceratinly where I live) have done away with discounts exemptions. For example, a 6 month exemption used be be given when a property became empty. No such exemption now.

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Replying to Wilson Philips:
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By User deleted
05th Sep 2015 12:41

OK thanks

Phil Yaboots wrote:
taxguru wrote:

As an aside, if the property was empty shouldn't the council tax exemption/discount apply?

I suspect most authorities (ceratinly where I live) have done away with discounts exemptions. For example, a 6 month exemption used be be given when a property became empty. No such exemption now.

OK thanks!

 

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Portia profile image
By Portia Nina Levin
05th Sep 2015 12:04

Council tax

Is payable by the owner of an empty property.

However, before the property was ready and available for letting there will not have been a property business, and so the proportion of the charge attributable to the period before there was a property business cannot be said to have been incurred for the purposes of the property business. It therefore fails part of the test to qualify as pre-letting expenditure.

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Replying to Jennifer Adams:
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By taxinfo
05th Sep 2015 17:12

really?

Portia Nina Levin wrote:

Is payable by the owner of an empty property.

However, before the property was ready and available for letting there will not have been a property business, and so the proportion of the charge attributable to the period before there was a property business cannot be said to have been incurred for the purposes of the property business. It therefore fails part of the test to qualify as pre-letting expenditure.

So what you are suggesting is that of ANY person who spends out money before their business starts can't claim that as tax deductible pre trading expenditure?

Surely that's the whole point....."pre trading expenditure" will, by its very nature, always be incurred BEFORE the business starts.

???

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By Manchester_man
05th Sep 2015 16:42

Worms and can anyone?

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By Tim Vane
05th Sep 2015 17:21

I think the argument goes that the council tax would have been payable even if the business had not started, or been planned, so it was not W&E.

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By carnmores
05th Sep 2015 17:29

i agree with Portia
Critical factor is when lettings business started it can be well before the property is let

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By taxinfo
05th Sep 2015 17:56

more thoughts

Tim - are you saying, then, the constant liability to council tax creates some sort of "duality of purpose" meaning it is never tax deductible? Surely that's not right. Even HMRC cites council tax paid by a landlord during occupancy as being an allowable deduction.

carnmores – so far as our client is concerned the “business” activities started immediately after her mother died when she took the decision to refurbish the property ready to receive its first paying occupants some 18 months later. So you would agree that council tax paid from January 2013 to November 2014 would be allowed on day 1 of the first letting, yes?

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By carnmores
06th Sep 2015 07:43

i think 18 months is stretching it
But maybe there is something tucked away in the refurbishment specs that clearly show it was to be let, ie compliance with fire and other regs etc

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By thomas34
06th Sep 2015 08:00

Agree with PNL

There was no lettings business so no deduction is allowed. When a letting business starts is a moot point - it can probably be argued it commences when the property is advertised as available for let. The daft thing is if the client already had another let property (and therefore a lettings business) he could claim all manner of expenses before the property in question was let.

 

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By King_Maker
06th Sep 2015 10:32

I see no problem in claiming the Council Tax as qualifying pre-trading/renting expenditure.

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Portia profile image
By Portia Nina Levin
06th Sep 2015 10:58

The problem is that in order to qualify as pre-letting expenditure it would have to be allowable if it were incurred during the currency of the letting business.

In order to clear that hurdle it must be incurred wholly and exclusively for the purposes of the lettings business.

Since the lettings business cannot commence until the property is available to be let, then any council tax in respect of it a period before that time is de facto incurred for a purpose other than that of the the lettings business, which had not yet commenced.

As Tim says, it would have been paid whether or not a lettings business had subsequently been commenced. The position does alter once there is a rental business, and would have been different had the property been purchased with the intention of letting.

In this situation though, until there is a lettings business, the expense is just there; it is not being incurred for the purposes of the subsequent lettings business.

That being said, the amount is probably fairly trivial, and in those circumstances, I probably would claim it. I doubt HMRC would take the point. That is not the correct answer, in my opinion, though.

Repair expenditure, to the extent that it was not to remediate predilapidations (and thus be capital) is valid pre-letting expenditure.

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By King_Maker
06th Sep 2015 12:55

@PNL

I understand your analysis - but I consider that the relevant legislation (Section 57 ITTOIA 2005) by "deeming" the expenditure to be ".......incurred on the START DATE,......" (my capitalisation) will be sufficient to enable a valid deduction for that Council Tax.

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Replying to Wanderer:
Stepurhan
By stepurhan
07th Sep 2015 09:31

Inherent assumption

King_Maker wrote:

@PNL

I understand your analysis - but I consider that the relevant legislation (Section 57 ITTOIA 2005) by "deeming" the expenditure to be ".......incurred on the START DATE,......" (my capitalisation) will be sufficient to enable a valid deduction for that Council Tax.

The inherent assumption of Section 57 is that the expense is incurred for the purpose of the trade. In fact, the very first line of Section 57 specifically states, "incurs expenses for the purpose of the trade". As has been pointed out multiple times, council tax paid out during a period when the property was not available for let cannot have been incurred for the purposes of the trade. Therefore Section 57 does not apply to this expenditure.
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By taxinfo
07th Sep 2015 10:58

surely PRE trading mean just that

Thank you all for your thoughts and I’m sorry to have stirred up what seems to be a hornets’ nest.

I hear what you’re saying, stepurhan, but, if I follow your line of reasoning, then what about, say, some painting /redecorating of the property in readiness for the first tenant?

Is that not allowable?

Surely PRE trading expenditure means what it says – expenses incurred BEFORE the start of the trade, i.e. before the property was available for let.

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Replying to memyself-eye:
Stepurhan
By stepurhan
07th Sep 2015 11:24

Wrong Focus

taxinfo wrote:
Surely PRE trading expenditure means what it says – expenses incurred BEFORE the start of the trade, i.e. before the property was available for let.
You are focusing on the wrong part. It is not the PRE, that is the important part, it is the TRADING.

So, subject to it not being capital in nature due to the property not being fit for letting, the purpose of painting/redecorating is to make the property more attractive to potential tenants. Hence it is incurred for the purposes of the trade in the same way as if you had bought stock to sell in a shop. By contrast council tax paid in a period prior to commencement has no effect on the letting. It does not put the owner in a position to let, nor does it enhance the property to allow letting, in any way, nor does it work to attract potential tenants. It is not a trading expense, therefore it does not fit the TRADING part of PRE-TRADING expense.

But you are the one who will have to defend any HMRC enquiry, so if you really want to run with your argument then go ahead.

 

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Portia profile image
By Portia Nina Levin
07th Sep 2015 11:13

Well, you asked whether people agreed with you, and the majority of those who posted didn't.

I understand King_maker's analysis, and read literally the legislation does have the effect stated. However, I believe that the purpose of the deeming provision is to simply provide an alternative deemed timing of the expenditure, and not to deem any alteration of the purpose of the expenditure.

As I have explained, the position does alter between the empty council tax expenditure and the repair expenditure, and would be different if the property itslef had been purchased for the purposes of a lettings business, rather than acquired as a result of happenstance.

There is no hornets' nest; simply differing opinions. And you have simply selected the (minority) opinion that you prefer, as you are at liberty to do.

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By King_Maker
07th Sep 2015 12:51

I understand the "available

I understand the "available to let" point - but it is not clear whether this applies here, and would probably depend on the level of refurbishment required.

Even if it did apply, my opinion would not change.

Now, if a potential landlord was living in  the property during the refurbishment, the W&E provision might not be satisfied. It is not know if this the case here either.

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By taxinfo
07th Sep 2015 13:46

thaak you everyone

King_Maker - no, the landlord was not living the property during the period January 2013 to November 2014 when the first occupant arrived. In that time it was being prepared for letting by clearing the property  of all contents and refurbishment and then handed to an agent to put on the market for rent.

Yes, of course, we would ideally like the council tax under discussion to be tax deductible but I have to say I had my doubts before even posing the original question.

I suppose I have been playing devil's advocate, to some extent, in order to encourage both sides of the debate.

That said, I'm still undecided so will mull it over. Maybe look through some case law.

In the meantime I'm grateful for you all taking the time to give your thoughts and advice. Much appreciated.

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By King_Maker
08th Sep 2015 11:07

If you remain concerned about the deductibility, and the tax in point is significant, I suggest you contact HMRC for their opinion/comment - or make a note in the white space. I recommend the latter - but include sufficient detail to avoid a discovery assessment etc.

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