Can you claim expenses incurred before a property is let?
02 Nov 2017
It’s always worth asking us about any expense you incur. For example, many of us know that when you own a property and have to spend a lot of money on it before letting it out, that expenditure is often deemed to be capital expenditure and not claimable against the future rent – it’s simply considered to be expenditure made on the property to bring it into the sort of condition in which it could be let out. But you don’t always have to miss out on the tax deduction. It’s a two-stage test, firstly one asks is the expenditure revenue or capital? And secondly, can it be claimed against the rent?
If it’s capital, it fails the test and you don’t get a deduction, you don’t even move on to the second part of the question.
There are two old cases here, the Law Shipping case and the Odeon Cinema case, which you have to think about. In the first case, the taxpayer bought an unseaworthy ship and had to repair it to get it sailing. That was capital expenditure because the asset was not usable in the state it was bought. However, in the Odeon Cinema’s case, they bought a really horrible, run-down cinema. It was a bit of a flea pit, but nevertheless, it was, at the time they bought it, being used as a cinema. They spent a lot of money doing it up. In that instance, the tribunal/court found that the expenditure counted as proper repairs because it was being used as a cinema when it was bought and was, therefore, in a usable state.
So, if we’re considering a flat where the owners have been told they need to rewire it and get a safety certificate before they can let it out, is that capital expenditure or this that revenue expenditure, claimable against the rent? Well, the further question one would ask there is, is the flat being lived in at present? If yes, it’s in a usable state so it’s similar to the Odeon Cinema’s case in that you just need to get a certificate to let it out. So, it’s revenue expenditure, not capital. So, we’ve passed, the first test and we can move on to the second. Is it in any way deductible against the future income? Well, yes because the landlord can use pre-trading expenses rules even though this is not a trade, and claim the costs as though incurred on day one of the let. As you can see, some of these circumstances can be tricky, but you’ve got us here to help you so don’t forget to ask us rather than just dismiss expenses as not being claimable.