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Capital or Reveue

Estate Agents but with a big Twist

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New Client (Ltd Co) - first year of accounts. Their business is renting out properties on behalf of landlords.  Basically estate agents but with a big twist. They approach owners of derelict properties to improve their properties to a stage whereby the properties are fit for rental. The "improvement" are paid by the client. Once the improvement is finished - the client will let out the property and pay the landlord a share of the rental income. The length of the agreement and the percentage split depends on the amount of initial expenditure on the properties. If the landlord decides to sell the property or shorten the agreement, they will be charged a penalty ... basically to recover the expenditure already spent.

Instances of expenditure could be knocking down walls (improve space), replacing kitchen units ... to buying white goods such as fridges/  televisions / furniture. These expenditures will eventually belong to the landlord once their agreement comes to an end. In the meantime, all ongoing repairs/renewals during the agreement period will also be paid by the client. 

 How would one treat the expenditure - Revene or Capital ?

Also, how would one treat the income  - say income of £12k was shared equally between the Ltd Co and the Landlord. Would the turnover of the company be £12k and Rental payments of £6k? Or Turnover = £6k?

Most grateful for any help. Thanks



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20th May 2019 20:08

You possibly need to look at the rules re lease premiums given your client has an obligation , it appears, to incur the expenditure on the property.

Sorry have to run now to watch final episode G of T

Thanks (1)
22nd May 2019 11:04

I would never have thought to link that to lease premium rules.... 30 years+ experience and you learn something new every day....

I would have just popped the costs in an asset account amortised them over the length of the agreement shown 100% of the rent receivable and the bit given to the owner as rent payable....sigh :(

Thanks (0)
20th May 2019 21:10

Thank you. I would never have thought of that!

In that case, would all the expenditure (decorating and white goods) be treated as premium paid?
Say if £10k was spent and the rental element of the premium turns out to be £9k and the term of the lease was 5 years. One would then release the £9k over the 5 years i.e. £1.8k per year as rental paid to the landlord. The £1k left would be considered as lease premium (capital) meaning there will always be a capital loss at the end of the lease term.
In regard to the landlord, they will have to declare £9k of rental income (plus actual rental income) in their first year of rental !
Would this be correct?

Thanks (0)
20th May 2019 21:48

There are disapplication rules if the expenditure, had it been incurred by the landlord, would have been deductible by the landlord, say considered repairs, vis a vis the landlord's rental business.

"When the rule applies
The rule applies if:

a lease is granted subject to terms imposing on the tenant an obligation to carry out any work on the premises, and

the cost of the work concerned would not be deductible by the landlord as an expense of the rental business, if the landlord had paid for it.

What charge is imposed
The landlord is treated as if the lease had required the payment of a premium, in addition to any actual premium. The amount is the difference between:

the value of the landlord’s interest in the property immediately after the commencement of the lease, and

the value of that interest if the lease had not required the tenant to do the work."

Not an area of tax I have ever actually had that much to do with, sure others on here can point to a bit more detail than the HMRC property notes.

Thanks (2)
22nd May 2019 11:20

Thank you so much DKJL. I'll research into this.

Thanks (0)
22nd May 2019 17:35

If I have understood the question correctly, it appears the expenditure is incurred by your client but the asset improved or created belongs to the landlord as owner of the property. White goods or separate items purchased may belong to the client and are sold to the landlord. I assume the rental agreement is between the tenant and the landlord. This suggests to me that the cost of improvements is a loan from your client to the landlord? If so, it seems to be repaid out of rents due to the landlord plus an element of interest assuming the client gets back more from the landlord than is spent on improvements? The landlord would get taxed on the full amount of the rent with a deduction for the interest. There is probably no deduction for improvements to the property as it is putting it into a condition for it to be let. The exact wording of all agreements and property law need to be carefully considered.

Thanks (0)
to tonyaustin
23rd May 2019 06:08


tonyaustin wrote:

The exact wording of all agreements and property law need to be carefully considered.

Don't go assuming a premium, or reverse premium, or loan... or anything. Read the documents.

Thanks (1)
24th May 2019 12:04

Thank you so much for all your input. Really does make me think about the whole situation.
Perhaps if I may - just one more question.

Would this be considered as carrying on a trading income? I would guess not as the company is not supplying services over and above the rental provided by the landlord.

Thanks (0)
24th May 2019 12:18

Surely it depends. If client has a property interest, then maybe it's taxed as rents. If client makes loans, then maybe it's interest. If client is being paid for work/services, then maybe it's trading.

What do the documents say?

Thanks (1)
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