Pre-letting expenses: Can I claim for expenses incurred prior to letting out my property for the first time?
Introduction. A frequent question posed by property investors is whether they are able to claim for expenses incurred in getting their property ready to let out for the first time. It is an important question, particularly when we look at the large amounts of capital required in property investing which makes it important for investors to ensure that they are maximising the use of allowable reliefs. This article will look to answer the question as to whether an investor can claim for expenses incurred prior to letting out their property and provide guidance on which expenses can be claimed, the timescales involved and how they would go about claiming these expenses.
What are pre-letting expenses? It is normally the case that a property investment business is classed as having started when it begins to receive income from rent for the first time. Any expenses incurred after the first property is let, where allowable, are deducted against rental profits, assuming they are revenue costs. Any expenses incurred after rents for the first property are being received are therefore allowable expenses as part of an ongoing rental business.
Expenses incurred prior to letting out the first property for the first time are known as pre-commencement expenditure or pre-letting expenses. They are unusual in that technically the rental business has not yet started. They are different to expenses incurred after the first rents are received as those incurred after the first let can be deducted using the usual rules for deducting expenses.
When are pre-letting expenses allowable? There are a number of important rules which can be used to determine whether pre-letting expenses are allowable:
Wholly and Exclusively. Any pre-letting expenses must be incurred wholly and exclusively for the purposes of the rental business. This means that if the expenses were not related to the future letting business they could not then be claimed as pre-letting expenses.
Revenue. Pre-letting expenses must be revenue in nature. Any capital expenses cannot be claimed against rental profits but you can use them as deductions when calculating the tax owed when you later come to sell the property. See are my expenses capital or revenue for help in determining the difference between the two types of expenses.
Seven Years. There is a limit of seven years prior to receiving rent for the property where pre-letting expenses can be claimed. You cannot go back any further than this.
No deduction otherwise allowable. This means that pre-letting expenses cannot be deducted elsewhere other than as pre-letting expenses.
Would be allowable if incurred after first let. Allowable pre-letting expenses would also need to be allowable to be claimed if they had taken place after the property had been let. If they would not be allowable after the property was let then they are not allowable as pre-letting expenses.
How to claim pre-letting expenses? Assuming you have pre letting expenses that meet the conditions listed above then how do you actually go about claiming them? This is quite straightforward. These expenses should be grouped together with the amount being totaled up and then deducted as if they had taken place on the first day that the property business started receiving rent. You should ensure that you keep good records and ideally in digital format in case HMRC start an enquiry later down the line.
Common examples of pre-lettings expenses. These are common types of pre-letting expenses that can be claimed so long as they meet the conditions in this article:
Conclusion. Property investors are able to claim pre-letting expenses so long as they are wholly exclusively for the property rental business and would be allowable if they had taken place after the property was let. Pre-letting expenses should be claimed as if they had taken place on day 1 of the property rental business.
Accufy Accounting can help you work out which expenses you may be able to claim as pre-letting expenses. If you would like to talk through this with someone then please get in touch.
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