Insights

If you have recently purchased an investment property and are planning to rent it out, you might be wondering whether you can offset some of the costs relating to repairs or other expenditure incurred prior to letting. Some expenses are allowable, but if you are buying a property in very poor condition and renovating it for rental, most of these expenses will not typically qualify for relief against rental income; instead, they may qualify for capital gains tax relief if the property is sold in the future.

This article explains what is allowable against rental income.

What are pre-letting expenses & what is included?

It is possible to offset so-called ‘Pre-Letting Expenses’ incurred whilst setting up a letting business before the first rental receipt is received. Allowable costs include travel expenses, phone bills, agent fees, marketing the property and some decorating. These can be deducted from rental income once letting commences.

There are strict rules governing what is allowed within the pre-letting expenses rules as follows:

• The expenses must have been incurred within seven years before the date the rental business starts;
• The expenditure cannot be used to offset tax due against any other income or capital gains;
• The expenses would be tax deductible if costs were incurred after the rental business started.

Pre lettings expenses are treated as if they were incurred on the same day that the rental business started and are deducted from the profits together with all the other letting expenses incurred during the tax year.

How are capital expenditure costs different?

Capital expenditure costs are not treated in the same way as expenses e.g., if you make improvements to the property these can only be deducted when the property is sold, and any capital gains tax liability is calculated. The same applies to the costs of buying the properly, such as legal fees; these are treated as capital costs.

Pre-letting expenses for repair & maintenance

One of the most common questions relating to the issue of pre-letting expenses relates to costs incurred for the repair and maintenance of a property which will be coming onto the rental market. It may be possible to offset costs against income subject to certain conditions being met:

• The cost relates to replacing worn or dilapidated items;
• The property was already in good enough condition to be rented out before repairs were conducted;
• The property price was not significantly lower due to the repairs and maintenance needed prior to letting;
• If the price was reduced, it was only based on the cost of rectifying ‘normal wear and tear’.

If you are concerned about whether pre-letting costs you have incurred will be allowable for income tax purposes, we recommend taking photos before and after the works so you can demonstrate the extent of works needed.

Typically, a ‘red book’ evaluation if conducted by a surveyor prior to purchase would also outline the rental value which provides further evidence of the state of the property.

If you would like help with property tax matters, contact us via partners@rjp.co.uk.

HMRC Property Income Manual