PreLetting Expenses 7 Years Before 1st Let-PIM2505

Elderly twin brothers renovate inherited property. Unable to sell. 'Forced' to let to close relative

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Twin brothers inherited grandad's run down house. They asked the son (a sickly builder) of one of the brothers to renovate the house with a view to selling it as soon as renovated. I act for the twin brother who is the builder's uncle.

Twin brothers ploughed sizeable amounts into grandad's old house and completely transformed it over a handful of years. They also paid the son as builder to do the work. It ought to have been a simple CGT issue of "sale proceeds less costs of improvement less probate value = capital gain, divided between each brother".

However, the house would not sell at anywhere near the asking price, so the twin brothers reluctantly decided to let the house to the (sickly) builder son, which obviously would also help this son out. The rent paid is around £700 per month, so it is not a peppercorn rent, but it may or may not be quite a full market rent.

The first rents were received 2018/19. I have to now consider any allowable expenses in the seven years prior to first letting. Most of the expenses would have been capital improvements. But there would have been revenue property running costs like water rates, council tax, insurance etc.

The question is, am I allowed to claim revenue expenses under the seven year rule, or is  a claim precluded because there was never any intention to rent out until the brothers reluctantly felt compelled to rent out in order to "cut their losses".

I did ask my client what he and his brother had originally planned to do were the property not to sell. He said that that eventuality had never crossed their minds.

Finally, the other brother's accountant has taken advice which suggests that a claim is NOT in order because steps were NOT taken to advertise the property etc. prior to letting to his son.

 

Replies (3)

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By Tax Dragon
27th Sep 2019 16:34

penelope pitstop wrote:

Finally, the other brother's accountant has taken advice which suggests that a claim is NOT in order because steps were NOT taken to advertise the property prior to letting to his son.

It's likely the right conclusion for the wrong reason.

Firstly, s272 imports s57 only if the accounts follow GAAP.

Secondly, even if s57 is imported, it has a business purpose test and you explain at length that this test is not met.

(It's possible there are other issues that you haven't asked about, but maybe more so for the other parties and not so much for your client, so best not to think too hard about it especially on a Friday afternoon.)

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Replying to Tax Dragon:
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By Tax Dragon
27th Sep 2019 16:39

Hm, I should have read your PIM extract before replying.

Having done so, I note s272ZA also imports s57 when the cash basis is used.

My second points stands though.

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By Accountant A
27th Sep 2019 20:49

Assuming that the law hasn't changed in the last 4 years, this might be useful. PNL gives some thoughts and they are usually on the money:

https://www.accountingweb.co.uk/any-answers/rental-property-pre-letting-...

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