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?
Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and the expenses are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.
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.
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.
Partner note: ITTOIA 2005, Pt. 3.