Property

Property lettings business

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Established property lettings business. Costs spent on acquiring a failed property purchase eg broker fees etc.

This can only be a revenue expense, not capital  (there is no property purchase). 

Question: Is this disallowable for tax (no property) as revenue expenditure : or tax allowable, the grounds being a normal cost of buying properties for rental income?  Thank you.

 

 

 

Replies (13)

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By Accountant A
13th Aug 2018 14:41

Abortive capital not revenue.

Not revenue unless it's a property trader.

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Replying to Accountant A:
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By davidbarry
14th Aug 2018 06:14

So how would you explain this to a client who would not understand the differences between property trader and a lettings business. Also, are you able to direct me to the law surrounding this area of tax? Thank you.

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Replying to davidbarry:
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By Tax Dragon
14th Aug 2018 06:56

davidbarry wrote:

So how would you explain this to a client who would not understand....


If they ain't gonna understand.... You should though. The purpose of the expenditure was to make a purchase. The fact that that did not happen does not change the nature of what was spent.
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Replying to Tax Dragon:
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By davidbarry
14th Aug 2018 10:34

Not really good enough! I have tested this advice (incidentally my sentiments as well, I hasten to add) and asked three very articluate business people I know, but it is true laymen in terms of understanding tax law and practice.
All thought that the expenditure would be allowable for tax. Explain to them abortive expenditure on a property purchase with no corresponding rental income.

'So a high fashion trader in the business of buying/selling, buys a line of clothing that does not sell and writes down the closing to £0 so getting tax relief.
Go explain the difference between property and other businesses: or is it the age- old adage: one is a trade and one is a business.
What does property law say? I can't find it.

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Replying to davidbarry:
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By DJKL
14th Aug 2018 11:09

Stock is a current asset consumed in the business, purchased for resale, property here is a fixed asset used by the business and transactions re its purchase and sale are in the regime of CGT not IT. Surely something like this would work re explaining to the client ( or even the representative sample)

p.s. does this help

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35325

p.p.s. or if further light reading re capital expenditure wanted start at-https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35010

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Replying to DJKL:
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By davidbarry
15th Aug 2018 07:53

Thank you.

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Replying to davidbarry:
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By chicken farmer
15th Aug 2018 09:16

Also read the well-known comments of Lord Cave in the 1926 case British Insulated and Helsby Cables.

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Replying to davidbarry:
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By Tax Dragon
14th Aug 2018 11:10

What DJKL said. Buying clothes? More like buying (or, here not buying) the fashion brand itself.

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Replying to davidbarry:
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By Accountant A
14th Aug 2018 12:13

davidbarry wrote:

So how would you explain this to a client who would not understand the differences between property trader and a lettings business. Also, are you able to direct me to the law surrounding this area of tax? Thank you.

It's an easy one. A property trader makes profit by buying and selling property. A lettings business makes a profit by "exploiting"/using the property to generate income (rent). A property trader will not hold property for a long period, a lettings business typically will.

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Replying to Accountant A:
paddle steamer
By DJKL
14th Aug 2018 12:50

Not sure time qualifies things, we as past dealers in land have sometimes held stock on the books for years (8-10), the catch is the bigger the site, the more complex the site, the more difficult the planning process and the more complicated the resale process the slower things happen.

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Jennifer Adams
By Jennifer Adams
14th Aug 2018 18:56

This cost will only be available if the client is actually in business as a property developer as Accountant A says.

The tests for trading in property are much the same as for any other trade. There is no definition in the legislation as to what constitutes a ‘trade’, therefore HMRC use the ‘badges of trade’ formula.
With one property there is no trade - its investment unless he is intending to set up in business as a property developer then it will prob be OK

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Replying to Jennifer Adams:
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By DJKL
14th Aug 2018 22:53

Not sure on your one property rule.

SPVs are very common re development, often banking requirements virtually dictate their use, we have certainly had single site SPVs that have acquired land and buildings, sought planing, say demolished and then sold the site to builders- for years this was our secondary activity, the core business being property rental.

I would never dream of arguing that this was not trading.

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Replying to DJKL:
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By Tax Dragon
15th Aug 2018 07:10

I agree Jennifer's comment was odd in part. In the OP's case though there was no purchase. Development for sale of one property might make a trade, but non-development of none....?

Whatever way you cut it, the question concerns capital expenditure for which no tax relief is available.

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