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Repairs after a rental business ends

Repairs after a rental business ends

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Simply put, if you have a rental property, end it (as in, the tenants leave and you make no attempt to replace them), then you put right wear and tear from the tenants and sell it, are the repairs the last of your rental expenses (as they arose due to the rental business, though after it had ceased) or are they 'private' expenses?

They aren't of a capital nature (it's painting and such, not moving walls or upgrading), so no CGT relief.

Would they be 'post cessation expenses'?

Replies (13)

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Portia profile image
By Portia Nina Levin
16th Sep 2014 12:02

The starting place

Is to prepare accounts applying GAAP. If you prepared accounts under GAAP to the date of cessation would you have accrued or made provision for the expenses? I think you would.

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Replying to Tax Dragon:
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By Manwithnoname
16th Sep 2014 12:13

Fair doos

Portia Nina Levin wrote:

Is to prepare accounts applying GAAP. If you prepared accounts under GAAP to the date of cessation would you have accrued or made provision for the expenses? I think you would.

Thanks, that makes sense.

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Replying to Tax Dragon:
Stepurhan
By stepurhan
16th Sep 2014 12:39

On what basis?

Portia Nina Levin wrote:
Is to prepare accounts applying GAAP. If you prepared accounts under GAAP to the date of cessation would you have accrued or made provision for the expenses? I think you would.
There is no binding commitment to make these repairs at the cessation date. There is no legal obligation to make the repairs at the cessation date. The repairs are made in order to make the house look better for sale. On what basis are you saying these could legitimately be accrued as costs of the rental business under GAAP?
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By paulwakefield1
16th Sep 2014 12:48

I think I would disagree that

there is an obligation for the repairs at the date of cessation if the date of cessation is when the final rental terminates. Consequently, under UK GAAP, you should not accrue for such costs.

 

Edit: Stepurhan beat me to it.  :-)

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Portia profile image
By Portia Nina Levin
16th Sep 2014 12:57

Binding commitment?

Where does binding commitment come from?

I think you need to go back to accountancy school. Actually, strike the word back.

There does not need to be a binding commitment. There needs to be an obligation.

You need to divorce the business from the owner of the business (and the owner of the asset). They are different personalities.

The business has been using the owner's asset for the purposes of the business and in the course of that use it has been damaged.

When the business ceases to use the asset and returns it to the owner to deal with it as he will, is the business not obliged to put right the damage that it has caused.

If I borrowed your house for my rental business and my tenants damaged it, would you consider that my business had no obligation to put the damage right.

I do not think that my business has any less an obligation, because it happens to be my house.

 

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Replying to SXGuy:
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By pateldr
16th Sep 2014 15:16

I suppose the owner / business should do separate tax returns?

Portia Nina Levin wrote:

 

You need to divorce the business from the owner of the business (and the owner of the asset). They are different personalities.

 

 

Legally it is the same person as there is no limitation of liability. Speaking of 'accountancy school' and 'numptiness'. No obligation, no accrual.

 

 

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Replying to SXGuy:
Stepurhan
By stepurhan
16th Sep 2014 16:42

What legal separation?

Portia Nina Levin wrote:
When the business ceases to use the asset and returns it to the owner to deal with it as he will, is the business not obliged to put right the damage that it has caused.
Only if the business and the owner were legally separate, AND the business had entered into a tenant-repairing contract with the owner. If the owner has simply rented out the property (and the OP has given every indication of that) there is no legal separation. Even if there was, without a tenant-repairing lease, the business would be under no obligation to repair "damage" if that was solely ordinary wear-and-tear.

I hope you are not charging clients for leading them into costly HMRC investigations.

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By paulwakefield1
16th Sep 2014 13:28

If the rental business

was operating through a separate legal entity and the lease specified R&R on termination, I would agree an accrual would be appropriate. There are no such indications in the OP; the owner has rented out the asset, stopped renting it,selling it - no 3rd party, no obligation, no accrual.

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By duncanedwards
16th Sep 2014 16:56

HMRC view

 

http://www.hmrc.gov.uk/manuals/pimmanual/pim2510.htm

 

Post-cessation expenses

In arriving at the tax due on post-cessation receipts the taxpayer can deduct any allowable business losses that were left unrelieved when the business ceased and also other expenses that would have been allowable had the business continued.

Post-cessation expenses but no post-cessation receipts

Where the taxpayer doesn’t have any post-cessation receipts they may still be able to claim relief sideways for post-cessation bad debts and certain specific defined post-cessation expenses. The sideways deduction is against other taxable income and capital gains of the year in which the debts proved to be bad or the payments were made.

 

Or this may help:

 

http://www.legislation.gov.uk/ukpga/2007/3/part/4/chapter/4

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Portia profile image
By Portia Nina Levin
16th Sep 2014 17:30

Legal separation?

What has the legal position got to do with it?

Economic substance takes precedence over strict legal form for accounting purposes. They teach you that at accounting school!

And the economic substance is that business is using the personal asset of the business owner and is obliged to hand it back to him in the condition in which it was first provided.

The wear and tear arose during the currency of the rental business. Without the rental business nothing would have been worn or torn.

As Duncan observes HMRC are happy that it is deductible, the only people that are not happy that it is deductible is a bunch of numpties that will happily take money off people for making them pay more tax than is actually due.

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By paulwakefield1
17th Sep 2014 09:30

The question of deductibility

was not the topic being discussed but treatment under UK GAAP. On the latter we are going to have to agree to disagree. The insults are unnecessary.

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Replying to Sarah Newland:
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By duncanedwards
17th Sep 2014 11:23

Tax

paulwakefield1 wrote:

was not the topic being discussed but treatment under UK GAAP. On the latter we are going to have to agree to disagree. The insults are unnecessary.

 

I think the discussion got waylaid.  I read the OP's original questions as tax.

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By paulwakefield1
17th Sep 2014 11:35

I agree

We all, except yourself, got diverted by the initial response.

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