Tax relief for costs of updating a property prior to letting - Landlords Financial | Bookkeeping Services Manchester

When a landlord buys a new property to let out, they may need to undertake some work prior to the first let, particularly if the property is tired or in need of updating. The extent to which relief will be available for the costs of updating the property will depend on the nature of those costs.

Start of the property business

If the property in question is the landlord’s first property, they will not have an existing property rental business. The property rental business normally starts when the letting first commences. The landlord may incur costs before the first property is let for the first time.

Once the letting has commenced, all activities relating to letting are treated as carried out in the course of the property business. Any expenses incurred in relation to preparatory work for second and subsequent properties relate to the existing property business and are deductible if they are revenue expenses incurred wholly and exclusively for the purposes of that property business.

Capital expenses are only deductible if the cash basis is used and the capital expenses are of a type that is deductible under the cash basis expenditure rules.

Pre-commencement expenses

Expenses which are incurred before the start of the property business can be deducted once the letting begins if the expenditure is:

· incurred within a period of seven years before the date the property business started;

· not otherwise deductible for tax purposes; and

· would be deductible if it had been incurred once the letting had commenced.

Thus, relief is available for costs incurred in updating the first property prior to letting if the above conditions are met. The expenses are treated as if they were incurred on the first day of the property business.

Capital v revenue expenditure

To determine whether relief is given in computing the profits of the property rental business, it is necessary to ascertain whether the expenses incurred in updating the property are revenue in nature. This will be the case if they are in the nature of repairs, such as decorating and making good.

Where the expenditure is revenue in nature, relief will be given under the pre-commencement rules if it related to the landlord’s first property. However, where a property business already exists, revenue expenditure incurred in updating a second or subsequent property prior to letting will be deductible in calculating the profits of the existing property rental business.

However, where there is significant improvement, for example, replacing an existing kitchen with a superior kitchen (taking into account developments since the original kitchen was fitted), or the property has been extended, the expenditure will be capital expenditure and will not be deductible in computing the profits of the property rental business. Instead, relief may be available in computing the capital gain or loss when the property is sold.

Tax relief for costs of updating a property prior to letting - Landlords Financial | Bookkeeping Services Manchester

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