Property Tax Case Study – Ceasing The Business

Lee Sharpe looks at how to deal with letting costs when a landlord ceases to let a single property, or the entire property business. 

HMRC’s own guidance (in the Property Income manual at PIM2510) states:

‘A general rule of thumb for rental businesses is that the old business stops where there is an interval of more than three years and different properties are let in the taxpayer’s old and new activities.’

HMRC will, however, happily override this rule of thumb if it believes the specific facts support a finding that the business has ceased and it is worthwhile – for instance, if the taxpayer is hoping to carry forward losses across a significant period of inactivity. 

 

Anita has a single property, which she has let for several years. After the latest tenant leaves, some work is required:

While she is having the work done, she instructs her agent to advertise the property as available for letting in a month’s time, to allow for the work to be completed. There is no improvement element to the work; the quality of the replacement items is in line with those that they replace (when those original items were new). 

These costs will all be allowable against Anita’s rental income, as they are merely putting the property back into its ‘original’ state. The conservatory may have been added after the rental business began but, once the original capital cost has been sustained, its maintenance costs will likewise be allowable. 

When Anita’s builder starts to replace the blown conservatory window units, he finds they have failed because the foundations of the property have moved. Anita notifies her insurers, who insist on a six month monitoring phase to see if there is any further movement. Anita is worried that substantial structural works may be required, so she advises her agent not to look for tenants in the immediate future, and she will advise when the property is ready to let out. Notably, she makes it clear that she still intends to let the property once any remedial works have been completed. 

At this point, the letting business is continuing. Not only are Anita’s repair costs allowable (to the extent that they are not covered by her insurance), but also heat and light, council tax, insurance, mortgage interest and all Anita’s other usual property costs are deductible on the basis that they are being incurred in the furtherance of her property business. 

Let’s assume that Anita then receives an offer of a job in Spain. She is delighted to accept but is not keen to be a long-distance landlady. She instructs her agent to market the property for sale. At the point that she decides she no longer wants to let her property, Anita’s letting business has ceased (remember, Anita has only one property). 

Anita’s costs to re-instate the property, as outlined above, will be allowable whether physically paid for before or after that decision: it was the letting/wear and tear while let which resulted in the need to incur those reparatory costs, so they remain a cost of letting. The cost of advertising for sale, and maintaining the property once re-instated, will not be allowable against the property business.

Benedict has twenty letting properties, both residential and commercial. Some of the properties are jointly owned with other parties. They nevertheless comprise a single letting business for Benedict, and he aggregates the profits and losses from his respective interest in each property to arrive at an overall taxable rental profit or loss for the year.

Benedict’s properties are heavily mortgaged, and he realises that the restriction of tax relief for finance costs announced in the summer 2015 Budget will erode his net income after tax to the point where the business is no longer viable. He believes (rightly or wrongly) that he should sell up before the market is awash with properties from landlords facing similar problems and he instructs his agent to market all his properties for sale. 

When a property becomes empty, it is no longer being let or held out for rent but for sale as a capital asset. Taking the case study of Anita above, any costs which have been incurred as a result of letting the property, such as maintenance or repair costs to re-instate the property, will still be allowable, even if paid for after the letting ceases. 

But once a specific property has been ‘made good’ and it is no longer being let, the costs incurred up to sale, such as:

will not be allowable against Benedict’s aggregate rental income (the last two costs may however, be allowable for CGT on sale). 

Benedict’s agent markets all of his properties, including those which are still let out. This is likely to ‘help’ commercial properties, but can be problematic for some residential properties marketed as homes. While being let (even if also being marketed for sale), the insurance, repairs, mortgage interest and similar costs remain allowable. Where possible, Benedict re-lets on rolling short-term contracts, to minimise his exposure to empty ‘for sale’ periods.

Benedict’s property business does not cease until he is no longer letting (or trying to let) even a single property. Until then, several costs will remain allowable (although some may diminish as the portfolio unwinds), subject to the underlying rule that they must have been incurred wholly and exclusively for the property business:

The above case studies illustrate that identifying if and when a letting business has ceased is extremely important; that the landlord generally has some control over when and how that happens; and that it is vital to keep good evidence of one’s intentions with the portfolio.