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Capital expenditure on property intended to let

Client purchased additional property with intention to let but ended up becoming main residence

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Hi Guys just a quick query. I think I already know the answer is no but wanted to check. 

Client has a rental property, which was her main residence prior to let. 

She purchased an additional property with the intention of letting that one also, and as a result incurred expenses bringing it up to standard for letting. 

She didn't end up letting the property in the end for whatever reason and moved in instead. 

She has asked if the expenditure can still be offset again her first rental. Revenue and capital with regards to future cgt. 

My feeling is no even though her intention was to let, it was never actually let and only ever became her main residence. 

However as always id appreciate your thoughts on the matter as to whether I'm correct or not. 

Thank you. 

Replies (11)

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By David Ex
19th Oct 2021 10:53

Interesting question.

The obvious answer is no but maybe there’s some digging to be done.

“She purchased an additional property with the intention of letting that one also”

Does that make sense when you know the client and her circumstances? Where was she living? In a rented property?

“incurred expenses bringing it up to standard for letting.

What work exactly was carried out? Does it look like the type and amount that would be spent on a rental property or on an individual’s own home?

“She didn't end up letting the property in the end for whatever reason”.

I think the reason could be important so I’d be wanting to know what had changed to cause (apparently) the client to move in and not let.

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Replying to David Ex:
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By SXGuy
19th Oct 2021 11:09

You make a valid point. It could come down to the reason why the letting never happened.

I will ask her to confirm the reason behind it.

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Replying to SXGuy:
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By David Ex
19th Oct 2021 11:27

SXGuy wrote:

You make a valid point. It could come down to the reason why the letting never happened.

I will ask her to confirm the reason behind it.

Was the second property not only made ready for a tenant but also marketed as to let? And, as I said, was the refurbishment consistent with an intent to let or with the owner wanting to move in?

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Replying to David Ex:
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By SXGuy
19th Oct 2021 11:49

I've asked her to confirm these points and will let you know the answers.

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By Duggimon
19th Oct 2021 10:59

It's one of those that seems at first glance to be preposterous, how on earth could expenses incurred on a property that was never let out be wholly and exclusively for the purpose of the property business. However, at the time they were incurred they definitely were and I'm not 100% certain that a change in purpose for the property further down the line excludes them.

Were it her first property, then the rules would be clearer, the property business never commenced. However it's not her first property, there is a property business, the expenses were incurred for the purpose of that business and only later was the decision taken to change things.

I still think they're probably not allowable, I'm just not 100% sure on how to prove it, the closest I've come is in PIM2505:

"Thus, after the first property has been let, any later expenditure leading up to the letting of the second and later properties is part of the rental business and can be deducted..."

It's not definitive but does imply the expenditure incurred on the second property ought to result in that property being let.

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By SteveHa
19th Oct 2021 11:14

If it's capital expenditure, why do you think it's relievable against rental income?

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Replying to SteveHa:
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By SXGuy
19th Oct 2021 11:50

Sorry my title is misleading.

I believe there were both revenue and capital expenditure but I've asked her to confirm exactly what expenses she has incurred as it may end up being all capital anyway.

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By SXGuy
19th Oct 2021 14:13

So I've spoke to the client again.

The reason for not letting the 2nd property is because after she purchased the property she realised there were a lot of repairs that needed to be carried out which were not disclosed prior to purchase. Things such as a leaking roof have caused her to have to pay for repairs as well as take legal action via solicitors against the vendor.

She still has the intention to let the property once the issues have been resolved but has decided to move in to the property whilst all of this is going on.

I've advised her of which costs are capital in nature and so wouldn't be allowed anyway but given that the issues she faces is the only reason for not letting the property straight away, then this now makes me lean towards some of the costs being allowable.

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Replying to SXGuy:
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By David Ex
19th Oct 2021 14:41

SXGuy wrote:

She still has the intention to let the property once the issues have been resolved but has decided to move in to the property whilst all of this is going on.

That’s a bit of a non sequitur really. Where was she living? Presumably not in another property she owned?

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Replying to David Ex:
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By SXGuy
19th Oct 2021 15:09

I believe she was renting herself for a short while and renting her own home at the time. Due to being made to work away.

When she came back rather than rent I guess she decided to live in the 2nd property

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By David Ex
19th Oct 2021 15:30

Taking a step back, it appears that the client believes the property was not in a fit state to let. That probably suggests the costs are more likely to be capital than revenue. If some/all of the costs are recovered from the vendor then it may be a moot point.

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