Knowing when costs can be deducted for tax purposes can be complex. It’s not uncommon for our clients to own rental property alongside their main business and as such we often receive queries relating to rental property and the rules that they must comply with.
Where a property is let out, there are likely to be periods when the property is empty, either between tenants or, in the case of a holiday let, between guests. Properties need to be maintained, and it is easier to undertake any work that may need doing, such as redecoration, while the property is empty. However, if costs are incurred while the property is not let, can you deduct the costs for tax purposes?
General rule for deducting costs on a rental property
Where work is undertaken on a property while it is empty, the key question to ask is whether the business is on-going. HMRC will not regard the business as having ceased if there is simply a gap between tenants and the intention is to re-let the property once the work is complete.
If the landlord has other properties in the same property rental business, as profits are calculated for the business as a whole, any allowable costs relating to the empty property are taken into account when calculating the profits for the business as a whole. If there is only one property, the business will continue as long as the intention is to re-let and is available for letting once the work has been undertaken, the costs remain allowable. If there is a loss because allowable costs for the period exceed rental income, the loss can be carried forward and set against any profits of the same rental business.
If the rental business has ceased, depending on the nature of the work, relief may be available under the post-cessation rules.
If the property is used privately once the work has been undertaken, and the costs relate to the private use, for example, changing the décor for personal taste in preparation for use as a residence, a deduction is not available as the costs are not incurred for the purposes of the business.
Property Repairs versus Property Improvement
Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot.
Depending on the circumstances surrounding the work you do on your rental property whilst it is empty and whether it is only to be empty temporarily you may be able to claim certain tax relief. Whilst each case is individual, it is worth seeking clarification on what costs, if any, you will be able to deduct prior to the commencement of work.
For further information on anything raised in this article or to discover how to gain greater visibility and insight for your business, get in touch. Simply call 0800 112 0880 or email email@example.com – a growing business needs more from their accountant.