Expenses may be incurred in the setting up of a letting business before the first rental receipt is received (travel, phone, advertising, etc.). If so, deduction from rental income may be possible once the letting starts.
Relief is only allowable under these special rules where the expenditure is:
- incurred within a period of seven years before the date the rental business actually starts;
- is not otherwise allowable as a deduction for tax purposes (i.e. against any other income or capital gain);
- would have been allowed as a deduction if it had been incurred after the rental business started.
Letting expenditure incurred pre-commencement is treated as having been incurred on the day on which the rental business starts and added to other allowable letting expenses incurred during the tax year. This total amount is then deducted from the total letting receipts for that year.
The expense must not be for the purchase of capital items. Capital expenditure is potentially tax deductible but there are separate rules of calculation.
Costs incurred in relation to the actual purchase of the property, including legal fees, are a capital cost allowed against the proceeds of the eventual disposal of property under the capital gains tax rules.
The seven year rule is of limited use to a landlord who previously lived in the property as his main residence as it would be hard to argue that the work had been carried out ‘wholly and exclusively’ for letting.
Expenses incurred for the repair and maintenance of items prior to the first letting income received may be allowable provided certain conditions are met, namely that:
- The cost is for the replacement of worn or dilapidated items.
- The property was in a fit state of repair for use in the letting business prior to it actually being let.
- The price paid for the property was not substantially reduced to take into account its dilapidated state of repair.
- The purchase price, if reduced, was reduced only to take into account ‘normal wear and tear’.
The surveyor’s report undertaken on the purchase of a property will often include an estimate of the rental income that could be derived from a property, which can be useful evidence that the property was in a ‘fit state of repair’ before money is spent on repairs.
Alternatively, the taking of photographs before repairs are undertaken could be admitted as proof.