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Apportionment of let property expenses

Property was previously PPR

Homeowner lived in PPR property then moved and let it out, and incurred substantial repair costs in the years prior to moving out, which also made the property suitable to be let out.

ITTOIA 2005, s 57 says that expenses incurred within seven years of the commencement of the letting, and in accordance with these rules, should be deductable on the first day of the letting.

s.34 states that expenses not wholly and exclusively for the trade are not allowable, however "If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade."

To the question:

If the landlord paid for a replacement boiler 2 years before moving out, and this boiler is expected to last, say, 10 years, and the property is expected to be let for at least the next 10 years, would it be fair to apportion 8/10 of the repair cost to the lettings business?

i.e. can we allow a percentage of repairs even though they were paid when the property was their PPR? That's the way I read it, would would be grateful for others opinions.

Thanks.

 

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07th Dec 2017 12:59

No.

The point about apportionment is that there must be an identifiable part of the expense that is for business purposes.

So having used the whole of the boiler for two years for private purposes, and then will use the whole of the boiler for 8 years for business purposes. That makes the expense incapable of apportionment between the private and business elements.

Contrast that with buying, say, 10 years worth of coal. Each year you only use 1/10th of the coal purchased. So the coal expense is capable of apportionment between the first tow years' usage and the subsequent 10 years' usage.

Obviously, HMRC accepting apportionment of things like motor expenses (which include, for instance, car tax) and use of home expenses (which does often include expenses that would occur anyway), is somewhat contradictory. It is though just pragmatism.

If you try and argue that the expenses made the property suitable for letting, you also wander into a Law Shipping argument, in my opinion.

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By Monsoon
07th Dec 2017 13:15

Thanks Portia.

I do see the difference between use of an asset such as a boiler, and use of coal, which is a quantity reducing over time.

But how does that then contrast with a sole trader who brings his personal computer into business use, and journals it into his books at current market value?

It's had previous exclusive private use. Going forward it's got business use. How does that differ from the boiler in my example?

Where does it say that apportionment has to be physical (e.g. the coal)? An "identifiable proportion of the expense" is 8/10 of the life of the boiler, surely? It is also, like the motor expenses, pragmatism.

(Also, what's Law Shipping? The Google didn't help me).

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to Monsoon
07th Dec 2017 13:42

The computer qualifies for capital allowances, which you can't claim for ordinary residential property letting, but for tax purposes you can only claim WDAs (not AIA).

The expenditure on the boiler though is a repair to the building, assuming a replacement with any element of improvement just being down to the state of the art.

I'm appalled that Google didn't give any meaningful links on Law Shipping. Here's one:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35450

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07th Dec 2017 17:02

Monsoon, the way I think about it in simple terms for simple people like me, is, anything the householder does is essentially his own business. All properties need running repairs such as new boilers, bathroom and kitchens eventually.

There is often "works done for letting" but all you are doing is putting the house the owner lives in into a position to make it rentable standard, ie mending stuff the owner broke. So this is nothing to do with the lettings side of things.

The general advice is let out, THEN do any repairs and you can claim 'em once its in the lettings business and our friend at HMRC wont have an argument.

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