Money spent to get a property ready to rent out

jennifernil

We are helping DD prepare her flat to rent out.
Having had it for 9 years, she felt that a few things needed repaired or renewed.

1. All walls repainted.

2. Carpets in hallway and bathroom replaced with vinyl laminate.

3. Leak in boiler, not economical to repair as 12 years old, so new boiler about to be installed.

Flat should be advertised in a week or two, can these pre-letting costs be deducted from her first year's income?

There will also be other costs such as mortgage interest, insurance, agent's fees, landlord registration, which we know she can deduct.

As it will be very near the end of the tax year before she gets any rental income, all this would leave her with a large loss in 12/13. Am I correct in thinking that she can carry this forward to 13/14?

She also has a full time job on PAYE.

nomunnofun

I would not have a problem about the allowability of any of the expenditure. See here about halway down:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2505.htm
;
this should also prove helpful

http://www.hmrc.gov.uk/agents/toolkits/property-rental.pdf

With regard to the loss, you are correct. In fact, she cannot do anything else with it. Will the property be furnished? If so it is decision time. do you claim Wear and Tear Allowance every year even if no renewals or do you claim as and when they arise? You cannot change the decision once made.

jimmo

Here’s one we prepared earlier.

https://forums.moneysavingexpert.com/discussion/4382211

In your daughter’s case I imagine that the main item of expenditure is the new boiler and, in the context of her ownership of the flat, it is highly likely that the new boiler is a replacement, not an improvement. Its cost will therefore not be allowable in the capital gains computation when it is sold.

In the context of her lettings, she appears to have passed onto her lettings business a flat with a faulty boiler and, if they pick it up, HMRC will consider itself fully justified in regarding the cost of the new boiler as being capital expenditure to the lettings business.

As regards the repainting of the walls, there used to an HMRC Instruction (which I cannot now find) on this along the lines of; if the routine maintenance cycle is to repaint every 5 years there is nothing inherently wrong with bringing the cycle forward to coincide with a change of use. However, if the lettings business acquired the property in a dilapidated state then even repainting the walls could be seen as an improvement. Taken in isolation, I would think that repainting will be OK but will add a bit more later.

Carpets and floor coverings are soft furnishings. Therefore claiming for replacements, even in pre-trading expenditure, would disqualify your daughter from claiming the 10% Wear and Tear allowance for all future years. Not necessarily a great idea.

http://www.hmrc.gov.uk/manuals/pimmanual/PIM3200.htm

To be honest, I am not sure what “floor coverings” covers. In my days it was rugs and lino, but I guess that it would be possible to argue that laminate flooring becomes part of the structure of the building. If so, it could be classed as an improvement, allowable against capital gains but not against lettings income.

Your daughter seems to be in one of those places where accountants and taxmen are unlikely to ever agree without a detailed examination of the finest details and then, quite frankly, it is down to amounts.

As a sort of aside, the last time I visited the In My Home forum you were struggling to find a suitable boiler for the flat. It was all above my head but, the more expensive the solution, the more likely it is that HMRC will come sniffing.

Bettie

jennifernil wrote: »

We are helping DD prepare her flat to rent out.
Having had it for 9 years, she felt that a few things needed repaired or renewed.


3. Leak in boiler, not economical to repair as 12 years old, so new boiler about to be installed.

.

Accountant said not to claim for a new boiler which was installed a few days before the tenancy began however I could claim for the boiler three year insurance policy.

chrismac1

As jimmo said - apart from the 10% wear and tear allowance point, which is where I would advise the original poster NOT to claim expenditure - pre-lettings expenditure is always going to be a question of judgement between accountants and HMRC.

I explain the rules to clients and advise them to exclude things which are blatantly capital, such as putting on a new roof to a dilapidated property. Every single client I've had wants to claim everything else and I can understand why - the purpose of the expenditure is to secure higher rents, which in turn means more tax for HMRC. So if it was my property I would be saying "disallow the expenses on the boiler and we'll need to take out the rental income as I could not have let the place without heating".

Shame the tax rules don't follow that bit of commonsense!

From a practical point of view, over the past 4 years I reckon I have submitted rental income self-assessment and limited company tax returns covering about 400 properties. Number of queries from HMRC over pre-letting expenditure = zero. Highest value of pre-letting expenditure claimed = £49k, admittedly on a FHL where capital allowances are claimable.

So the risk of an enquiry in my view is under 1%.

nomunnofun

chrismac1 wrote: »

As jimmo said - apart from the 10% wear and tear allowance point, which is where I would advise the original poster NOT to claim expenditure - pre-lettings expenditure is always going to be a question of judgement between accountants and HMRC.

I explain the rules to clients and advise them to exclude things which are blatantly capital, such as putting on a new roof to a dilapidated property. Every single client I've had wants to claim everything else and I can understand why - the purpose of the expenditure is to secure higher rents, which in turn means more tax for HMRC. So if it was my property I would be saying "disallow the expenses on the boiler and we'll need to take out the rental income as I could not have let the place without heating".

Shame the tax rules don't follow that bit of commonsense!

From a practical point of view, over the past 4 years I reckon I have submitted rental income self-assessment and limited company tax returns covering about 400 properties. Number of queries from HMRC over pre-letting expenditure = zero. Highest value of pre-letting expenditure claimed = £49k, admittedly on a FHL where capital allowances are claimable.

So the risk of an enquiry in my view is under 1%.

Whoops! I saw leak, repair and boiler! But it wasn't repaired - it was replaced. Agree wholeheartedly with the previous posters on this point.
Must read the postings carefully!

jennifernil

Oh dear! I am thoroughly confused now.

The boiler (which is about to be replaced) worked fine, passed its Gas Safety inspection, but had an intermittent leak from something inside the casing. It was dripping straight from some pipework/part and not on to any electrics, so all that was required was to have an ice cream carton under it to catch the occasional drip, and top up the system every few months if the pressure dropped too low.

While this is something that an owner can live with, it is not something we felt a tenant should reasonably be expected to deal with, so we got 3 different guys in to give an opinion.

The consensus was that it was repairable, would cost about £300, but as the boiler was already almost 12 years old we could expect other things to start going wrong, so the sensible alternative was to replace with a new boiler that would be guaranteed for a few years, and be more reliable. This will cost £1100.

The carpets replaced were carpet tiles and were in good condition. They were about 6 years old (bathroom) and 4 years old (entrance vestibule). However, carpet in a bathroom is probably not the best idea anyway, and for tenants we thought the waterproof vinyl laminate would be better and easier to keep clean. The cost was just under £200 in total.

The repainting was done on the advice of the letting agents, using neutral colours to make the rooms appear lighter and more spacious. And of course to ensure the tenants started with nice clean walls. Cost of paint was about £130.

So, would any of this be able to be claimed as pre-letting costs? I am struggling to decide, having read the posts above, but I think you are all saying "NO" ??

The flat is not furnished at present, on the advice of the agent, who suggested giving the choice of furnished or unfurnished would attract a wider range of clients.
DD has all her furniture at her new house, so will have to buy furniture if the flat needs to be furnished.

If it is let unfurnished, does this change the advice?

And what if she were later to let it furnished? Would she then be able to use the "wear and tear" allowance?

One futher question .......

Jimmo mentioned CGT on sale. Does she need to establish a value for the flat on the day it is first let, or is it only the original purchase price that is relevant?

Bettie

jennifernil wrote: »

Oh dear! I am thoroughly confused now.

The boiler (which is about to be replaced) worked fine, passed its Gas Safety inspection, but had an intermittent leak from something inside the casing. It was dripping straight from some pipework/part and not on to any electrics, so all that was required was to have an ice cream carton under it to catch the occasional drip, and top up the system every few months if the pressure dropped too low.

While this is something that an owner can live with, it is not something we felt a tenant should reasonably be expected to deal with, so we got 3 different guys in to give an opinion.

The consensus was that it was repairable, would cost about £300, but as the boiler was already almost 12 years old we could expect other things to start going wrong, so the sensible alternative was to replace with a new boiler that would be guaranteed for a few years, and be more reliable. This will cost £1100.

The carpets replaced were carpet tiles and were in good condition. They were about 6 years old (bathroom) and 4 years old (entrance vestibule). However, carpet in a bathroom is probably not the best idea anyway, and for tenants we thought the waterproof vinyl laminate would be better and easier to keep clean. The cost was just under £200 in total.

The repainting was done on the advice of the letting agents, using neutral colours to make the rooms appear lighter and more spacious. And of course to ensure the tenants started with nice clean walls. Cost of paint was about £130.

So, would any of this be able to be claimed as pre-letting costs? I am struggling to decide, having read the posts above.

The flat is not furnished at present, on the advice of the agent, who suggested giving the choice of furnished or unfurnished would attract a wider range of clients.
DD has all her furniture at her new house, so will have to buy furniture if the flat needs to be furnished.

My boiler was old but worked fine so similar situation. No claim.
I decided to let unfurnished. The furniture I had there I gave away plus carpets, also gave away the fridge freezer, both old but working ( gave them all to the tenant). This was because I didn't want to have PAT tests every year. I have all gas appliances done yearly for which I claim. My accountant allowed the decorating to be refreshed so a claim for brushes paint etc went in for £200 pre letting. I claimed for petrol for travelling to and from house. I claimed for the accountant £100.

jennifernil

Having read this.....

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2505.htm

I had thought that the expenditure on the boiler and the painting would be allowed, but was less sure regarding the flooring.

This bit seemed particularly relevant......

quote...

• would have been allowed as a deduction if it had been incurred after the rental business started.

This means that, to be allowable, the expenditure must be incurred wholly and exclusively for the purposes of the rental business and must not be capital expenditure etc (see PIM2000 onwards).


I thought that he boiler would have come under renewals as it is a fixture, and repainting is allowed . I read this......

Renewals & 10% wear and tear allowance

However, in addition to the 10% allowance, a taxpayer can also deduct the net cost of renewing or repairing fixtures that are an integral part of the buildings. The net cost means the cost of the replacement less any amount received for the old item. See below for renewals of fixtures in unfurnished property.

Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold. For example, baths, washbasins, toilets, central heating installations. Expenditure on renewing such items is normally a revenue repair to the building. It is due even though the 10% wear and tear allowance has been deducted.



Or have I got it all wrong?

I doubt CGT will be a big problem for her anytime soon, she has owned the flat since December 2003, and since then prices have risen/dropped/stagnated, so it is most likely not worth any more now than what she paid.

Bettie

jennifernil wrote: »

Having read this.....

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2505.htm

I had thought that the expenditure on the boiler and the painting would be allowed, but was less sure regarding the flooring.

This bit seemed particularly relevant......

quote...

• would have been allowed as a deduction if it had been incurred after the rental business started.

This means that, to be allowable, the expenditure must be incurred wholly and exclusively for the purposes of the rental business and must not be capital expenditure etc (see PIM2000 onwards).


.

My tenant moved in the day after the boiler was fitted. My accountant said the rental was from the day of the tenancy, not the day I decided to rent out which was a few weeks before ( hence getting the boiler done early) I did ask if I should allow the tenant to move in then a few weeks later have the boiler done. My accountant said I would be taking a chance. It could draw unwanted attention from Mr Tax Man and I could be fined so it was my choice as to whether it was worth the risk. I consulted an online landlords group that I'm in and they advised against it. Mine would have been relief on £2000 so I decided not to.

jennifernil

Yes, we just wanted it out of the way before a tenant moved in, no doubt complained, and then something would have had to have been done anyway. It could go weeks without a problem, so it would have been OK for a while, but with it being a combi boiler, if it failed, the tenant would have had no hot water.

Also, it is much more convenient to do it before any furnishings are in place as the boiler is in a small cupboard in a small room.

Of course, a boiler can break down at any time. It cannot be unknown for one to need a repair or replacement just after a property is first let.