The property rental business is treated as commencing with the start of the first letting. However, it is likely that the landlord will have incurred some expenses prior to the let in order to get the property ready for letting, and possibly in purchasing the property.
To the extent that these are revenue in nature relief is available under the pre-trading rules. These enable expenses incurred before the start of the property letting business to be relieved when calculating profits, provided that:
• the expenses were not incurred more than seven years before the start of the business;
• a deduction would be allowed for the expenses (under the normal rules for deductibility of expenses) if they were incurred after the start date; and
• they are not otherwise deductible.
Relief is given by treating the pre-trading expenses as if they were incurred on the first day of the property rental business.
Capital expenditure incurred prior to the first let cannot be relieved in this way, although capital allowances may be available.
Once the property rental business has started, any expenses incurred in relation to the letting of any second and subsequent properties can be relieved against the income from the first property. This is because of the rule that all lets in the UK are treated as comprising a single property rental business.
The first basis period for the property rental business runs from the date that the letting commenced rather than the start of that tax year.
HMRC regard a property rental business as coming to an end when the last property is disposed of or used for another purpose, for example if the property reverts to owner occupation.
It may be that a property is let for a while and is then owner occupied before being re-let. Although it will be a question of fact whether the original business has ceased and a new business has commenced (triggering cessation and commencement rules), as a rule of thumb, if the period between the lets is less than three years, HMRC regard the original business as continuing such that the commencement and cessation provisions do not apply. Likewise, a property rental business will not cease simply because the property is empty between lets.
Where the rental business has ceased it is possible that receipts and expenses may arise after the cessation. Special rules apply to deal with these.
If a receipt is received after cessation, the receipt cannot form part of the income of the property rental business as that business no longer exists. Instead the receipt is taxed under separate rules as a receipt not otherwise chargeable to tax. Post cessation receipts may take the form of insurance payout or the recovery of unpaid rent, for example.
If the landlord has suffered post cessation expenses, these can be set against any post cessation receipts, reducing the amount that is taxable in respect of any such receipts. However, if expenses are incurred post cessation but there are no post cessation receipts, sideways relief against other income and gains is available for certain expenses and for post-cessation bad debts. However, the range of expenses that qualify for this relief is limited and relates in the main to claims arising from the trade and making good.
Ensure familiarity with the rules on commencement and cessation to maximise relief for pre-commencement and post-cessation expenses.