Are my rental expenses from the LAST tax year allowable in THIS year’s return?

by Readers Question

14:16 PM, 9th November 2020
About 3 weeks ago

Are my rental expenses from the LAST tax year allowable in THIS year’s return?

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Are my rental expenses from the LAST tax year allowable in THIS year’s return?

We moved out of our home on 1st February 2019. Since December 2018, we had advertised the property to let from 1st Jan 2019, and put everything in place to satisfy our mortgage lender’s demands (landlord insurance etc) when we applied for ‘permission to let’ in early December. Our interest rate was increased by 1% by the lender from 1st January (the date from which they granted ‘permission to let’) but the first tenant did not move in until 1st April 2019.

Between 1st Feb and 1st April we incurred costs associated with the property (mortgage interest payments, council tax, water rates, landlord insurance, minor repairs etc.) but did not receive any rental income until 1st April 2019.

My question is: can the expenses we incurred between Feb and April 2019 be offset against the rental income we received in 2019-20, or should I have declared them as a ‘loss’ on last year’s tax return?

I would be very grateful for any advice fellow landlords (or tax experts!) can offer.

Many thanks.

Janie


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Comments

Neil Patterson

14:20 PM, 9th November 2020
About 3 weeks ago

Hi Janie,

I have spoken with Mark Alexander and he said that expenses incurred before the first day you let the property are calculated as a Capital expense and not a Revenue expense.

Therefore, you couldn't claim back the previous years expense against income.

Chris Bradley

17:20 PM, 9th November 2020
About 3 weeks ago

Will hmrc allow insurance as a capital expense?
I thought these revenue were pre trading expenses and were treated as if they occurred on first day trading

David

9:36 AM, 10th November 2020
About 3 weeks ago

I've never heard that point about them being capital before. My understanding was that expenses incurred in the preparation of a property to let can be offset against rental income as though they were incurred on the first day of the let. Its certainly what I and other landlords I know have done.
In your case Janie, I dont think you could claim anything prior to 2 Feb as that's the first day the property could have been occupied by a tenant.

Jireh Homes

10:38 AM, 10th November 2020
About 3 weeks ago

Stand to be corrected, but my understanding is as that outlined by Chris and David that expenses incurred prior to a lease are allowable against income as revenue, so in your case add to expenditure for 2019/20, as easier than changing prior years return to declare a loss.

Chris Harris

10:43 AM, 10th November 2020
About 3 weeks ago

Setting aside the capital expense v revenue expense argument, is it possible that you don't appreciate that the rent you received on April 1st is in the same tax year as your expenses? The tax year runs from April 6th to April 5th the following year.

Darren Peters

10:55 AM, 10th November 2020
About 3 weeks ago

"My understanding was that expenses incurred in the preparation of a property to let can be offset against rental income as though they were incurred on the first day of the let"

I thought this too but it's no that simple. Looking at HMRC website it says:

"If you carry out work on a property before leasing or renting
Some costs of work on a property before you lease or rent it will be capital expenses, and therefore not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.

Any works done to put it back into a fit state for letting are unlikely to be repair works. They will be capital works as they will improve the property. The costs for these works will not be an allowable expense."

from here:
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

Also see here:
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2505

You may be able to claim a discount of council tax on the empty property from the council depending on their local rules.

Not advice, just my opinion.

Olls63

12:40 PM, 10th November 2020
About 3 weeks ago

From HMRC Rental Income Manual. Expenses that would not be allowable are those incurred in bringing the property to a state, where it can be let.

"Expenses incurred before rental business begins
A customer may incur expenses for the purposes of a rental business before that business starts. If so, they may be able to claim a deduction for them once the letting begins (ITTOIA05/S57 or CTA09/S61). Relief is only due under these special rules where the expenditure:
is incurred within a period of seven years before the date the rental business is started, and
is not otherwise allowable as a deduction for tax purposes, and
would have been allowed as a deduction if it had been incurred after the rental business started.
This means that, to be allowable, the expenditure must be incurred wholly and exclusively for the purposes of the rental business and must not be capital expenditure (see PIM1900 onwards). Thus, for example, rent paid to lease the first rental business property could be allowable under these special rules if it is due before the property is first let provided the property was acquired solely for the purposes of the rental business.
Relief is not due under the special rules for, for example, rent on the customer’s own private residence which is payable before they begin to let it (after, say, taking a job in another part of the country). Their expenditure on rent was not incurred wholly and exclusively for the purposes of their rental business, it was incurred to provide them with a home. Relief would be due under the ordinary rental business rules for rent for periods after the property was let commercially.
Qualifying pre-commencement expenditure is treated as incurred on the day on which the customer first carries on their rental business. This is deducted, together with the other allowable expenses of letting, from the total receipts of the business for that year.
For detailed guidance on pre-trading expenditure see BIM46350."

NewYorkie

12:42 PM, 10th November 2020
About 3 weeks ago

This conversation came up elsewhere just the other day, and I said I believe the key consideration is when the property is made available for rent. There is still the issue of capital vs revenue, but I would say if you made it available to let it in February, and incurred expenses after that date, you can claim the usual expenses, including agency fees, on your 2018/19 return. Rental income after 5th April will be for the 2019/20 tax year's return.

Mick Roberts

16:21 PM, 10th November 2020
About 3 weeks ago

Reply to the comment left by Neil Patterson at 09/11/2020 - 14:20
I concur with Neil,

I've had 4 Tax investigations & that rule Neil says has been rammed down my neck.

Any money spent before any rent received on newly bought house was Capital expense. HMRC may have changed now, who knows.

Paul Shears

18:57 PM, 10th November 2020
About 3 weeks ago

Reply to the comment left by Chris Bradley at 09/11/2020 - 17:20
Correct.

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