When starting a new property rental period there will usually be a preparatory phase during which expenses will be incurred. To what extent is relief available for expenses incurred before the property is let?
Start of the property rental business
A property rental business usually starts when the letting first commences. Once the letting has commenced, relief is available for expenses in accordance with the usual rules to the extent that the expense is incurred wholly and exclusively for the purposes of the business and is revenue in nature. Relief for capital expenditure is given in accordance with the relevant rules depending on whether the accounts are prepared under the cash basis or the accruals basis.
The start date is important as it provides the dividing line between pre-commencement expenditure and that incurred in the running of the business.
Relief for pre-commencement expenditure
A landlord may be able to claim relief for expenses incurred for the purposes of a property rental business before the start of that business. Relief is only available if:
- The expenditure is incurred within a period of seven years before the date on which the property rental business started.
- The expenditure is not otherwise allowable for tax purposes.
- The expenditure would have been allowed as a deduction if it had been incurred after the rental business started.
Thus, to be deductible, the expenditure must be revenue in nature and incurred wholly and exclusively for the purposes of the property rental business.
Where relief is available, the qualifying pre-commencement expenditure is treated as if it was incurred on the day on which the property rental business commenced and is deductible in computing the profits for the first accounting period.
Jaz purchases an investment property in January 2021 which he plans to let out. In preparing to let the property, he incurs administration expenses of £1,200 and undertakes repairs costing £3,000. The property is first let on 28 June 2021. Jaz claims relief for the pre-commencement expenses of £4,200, which are treated as if they had been incurred on 28 June 2021 – the date on which the property rental business commenced.
Partner note: ITTOIA 2007, s. 57; CTA 2009, s. 61