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Allowable Expenses on Property Income

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I've recently taken on a new client who operates a limited company renting a commercial property.

The property is owned by him and two other siblings who aren't connected to the company and no rent is paid to them by the ltd company for use of the property. Further, there isn't a formal rental agreement between the siblings and the company.

Rental income is from an unconnected third party.

In the first year of trading, a substantial amount of money has been spent on improvements to the property through the company - A/C units, partitioning into offices and decoration - alongside regular revenue expenditure.

Three questions spring immediately to mind:

  1. Is this classed as property income even though the company has no formal interest in the property?
  2. How would you treat the capital expenditure given there is no lease in place?
  3. Is there a tax implication in sustantially improving the property with no lease agreement in place?

It's not a position I would have started from, ha ha!

Replies (7)

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By Jammy
18th Feb 2021 11:44

Guess everyone is as clueless as me on this one then too!

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Replying to Jammy:
By Wanderer
18th Feb 2021 11:58

Doubt it's that. More likely because "Member Since: 16th Feb 2021" and your question doesn't display any effort on your own part to do any research yourself an lay out your thinking and conclusions so far.
You'd probably get a better reaction if you did that first.

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Replying to Wanderer:
By Jammy
18th Feb 2021 12:28

Fair enough Wanderer, I have used this forum a lot and appreciated the advice on it though never previously contributed. Hence only just signing up.

This is an area I am unfamiliar with and only agreed to do the work as they were related to another client. At that point it became apparent that the situation was pretty informal shall we say.

Here's my thinking:

1. Yes, its property income as it is derived from giving the right to use the asset. Though the company doesn't formally have that right to give as there is no rental agreement in place with the sibling I guess this wouldn't be challenged by them.

2. The company has no rights to future income from the leasehold improvements as they don't have a formal rental agreement in place. So write the expenditure off.

3. Genuinely not sure on this point, having looked back at a number of threads on here there was some suggestion that a company could be providing a benefit to the owners by improving a property leased from them. Advice gratefully received.


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By stepurhan
18th Feb 2021 13:56

No agreements in place for anything. Property owned personally.

Sounds like a personal rental where the money has just ended up in the wrong place (a company that has no rights to rent out the property) so taxable personally. Plus significant loans to (presumably) a participator for the things the company has bought for a personal property. (Depending on rental income to offset such loans)

How do you intend to argue otherwise? Bearing in mind anything you put in writing now would either have to be backdated (illegally) or only effective from now.

Justin Bryant may be along shortly to say that there is an effective arrangment in place so you don't have to worry about backdating. You're the one that would have to defend that so now it is up to you if you want to pursue that route.

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Replying to stepurhan:
By Jammy
18th Feb 2021 15:06

Thanks Stepurhan, that's helpful.

I guess I was wondering if there was an effective arrangement as you mention. Wasn't sure whether that was arguable or not.

Director put the funds into the company in the first place so the purchasing of assets is made from funds lent by him originally.


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Hallerud at Easter
18th Feb 2021 15:43

Does the unconnected third party who pays rent to the company have anything in writing, if so, with whom, did the individuals sign and execute a lease, did company execute a lease, is there no written lease from anyone re the unconnected end user ?

If the individuals are stupid enough to let someone into a commercial property without documenting the agreement you frankly do not want them as clients.

Do you not also down south have some interesting legal rights re tenants and retail units which we do not have up here, please say it is not a retail unit?

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Replying to DJKL:
By Jammy
19th Feb 2021 12:18

Hi DJKL, no it's not retail. There is a signed agreement made between the tenant and the ltd company, which supports the idea that the rent is going to the ltd company.

Ultimately, I think they were given some bad advice in the first instance around letting it through a limited company and there doesn't appear to be any advantages to the set up to be honest.

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