Expenses may be incurred in the setting up of a letting business before the first rental is received (e.g., travel, phone, advertising, etc). Strictly, such expenses should not be claimable as the business would not have started until the first rental income payment has been received (cash basis) or accrued for.
However, relief is allowed under special rules where the expenditure:
- has been incurred within a period of seven years before the date the rental business actually starts;
- is not otherwise allowable as a deduction for tax purposes (i.e., against any other income or capital gain);
- would have been allowed as a deduction if it had been incurred after the rental business started.
Letting expenditure incurred pre-commencement is treated as having been incurred on the day the rental business starts and is added to other allowable letting expenses incurred during the tax year. This total amount is then deducted from the total letting receipts for that year.
A deduction for any capital expenditure is not available (see Chapter 3).
Costs incurred in relation to the actual purchase of the property, including legal fees, are a capital cost allowed against the proceeds of the eventual disposal of the property under the capital gains tax rules.
The seven-year rule is of limited use to any landlord who previously lived in the property as their main residence as it would be hard to argue that the work had been carried out ‘wholly and exclusively’ for letting.
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