Mortgage interest before property has a tenant

jennifernil

When claiming tax relief on mortgage interest for a property that is rented out, can your claim include interest incurred while the property was empty, being prepared for letting, and while a tenant was found?

Or can you only claim for the period after the tenant moved in? Or is it some other date?

Dates involved here are.....

property empty from 4th January (owner moved to new property, BTL mortgage in place from late December to release equity )

placed with agent 7th March

tenant moved in 26th March

Nicola_Ed

Hi

The short answer is yes. Below is the guidance from HMRC which you may wish to keep a copy to prove the basis of your claim ( This is from HMRC website but should be printed as it may be amended) I have highlighted in red the relevant parts.

PIM2505 - Beginning and end of a rental business: commencement

Summary

• Usually a rental business begins when letting first commences.
• Allowable revenue expenditure incurred before the rental business begins can be relieved under the ICTA88/S401 or ITTOIA05/S57 provisions for pre-trading expenditure.

Start of rental business

The date a rental business begins is a question of fact that depends on the nature of the rental business. Normally a rental business will begin when the taxpayer first enters into a transaction that exploits their land or property in a way which gives rise to a receipt of some kind.

Where the rental business is letting property, the business can’t begin until the first property is let. You need to distinguish between activities that are preparatory to letting and those business activities that are part of letting. Once a rental business has started, all activities will be treated as carried out in the course of one business, subject to the points made in PIM1020 about businesses carried on in different capacities and the points made at PIM1030 about partnerships.

Thus, after the first property has been let, any later expenditure leading up to the letting of the second and later properties is part of the rental business and can be deducted - provided it meets the conditions outlined at PIM2000 onwards (it is incurred wholly and exclusively for the purpose of the business, it isn’t capital expenditure etc).

The question of when a rental business starts normally only arises, therefore, when a taxpayer receives income from property for the first time, or begins to exploit their land and property for a profit for the first time. Less commonly, it may arise if a taxpayer resumes letting again having ceased an earlier rental business - see below.

The start date can be important because it can affect the amount of expenditure allowable in calculating rental business profits. Some expenditure incurred before the business begins may not be allowable but some may be allowable under special rules, if so, the deduction is given in computing the profits of the business in the first year. See next paragraph for more on expenses incurred before the business begins.
Expenses incurred before rental business begins

A taxpayer may incur expenses for the purposes of a rental business before that business starts. If so, they may be able to claim a deduction for them once the letting begins, (ICTA88/S401 or ITTOIA05/S57). Relief is only due under these special rules where the expenditure:

• is incurred within a period of seven years before the date the rental business is started, and
• is not otherwise allowable as a deduction for tax purposes, and
• 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). Thus, for example, rent paid to lease the first rental business property could be allowable under these special rules if it is due before the property is first let provided the property was acquired solely for the purposes of the rental business.

Relief isn’t due under the special rules for, say, rent on the taxpayer’s own private residence which is payable before they begin to let it (after, say, taking a job in another part of the country). Their expenditure on rent was not incurred wholly and exclusively for the purposes of their rental business - it was incurred to provide them with a home. Relief would be due under the ordinary rental business rules for rent for periods after the property was let commercially.

Qualifying pre-commencement expenditure is treated as incurred on the day on which the taxpayer first carries on their rental business. This is deducted, together with the other allowable expenses of letting, from the total receipts of the business for that year.
Legislation

For CT cases (and IT cases to 2004-05) ICTA88/S401 is applied by ICTA88/S21B.

For IT cases (for 2005-06 onwards) ITTOIA05/S57 is applied by ITTOIA05/S272.
Further guidance

For detailed guidance on pre-trading expenditure see BIM46350.

holly_hobby

Quick answer is, if the property is fully available, habitable (ie not in the middle of refurb etc) and being marketed for let, then yes you can offset mge interest (and associated costs directly attritubuted to management of the business) during an untenanted period.

But of course you'll need business profit (aka rental income) to actually offset such costs against.

Hope this helps

Holly

jennifernil

So, if the property is being painted, new boiler, other stuff, before being marketed, then mortgage interest incurred in this period cannot be claimed?

Property was habitable, but owner wanted to redecorate, clean, and make repairs/fit new boiler.

Council Tax exemption for this empty period was granted.

jimmo

For reasons discussed at the time, I think the expenditure on the new boiler is capital but mortgage interest will always be revenue.

The only question then is whether it is incurred for the lettings business, for some other reason or for more than 1 reason.

The example given in PIM 2505 seems to apply pretty well here. In case it helps here is a link but the words are all in post #2 above.

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

If I’ve read you correctly, the owner lived in the flat until 4 January and so any mortgage interest arising before 4 January had at least a dual purpose:

1) provision of a place to live for the owner.

2) for the lettings business.

There is no way to apportion the mortgage interest between those 2 purposes and it therefore fails the “wholly and exclusively” elements and is not allowable.

Once the owner had moved out purpose 1 above has ceased and perhaps only the owner can know with any certainty, but on the face of it, the interest since 5 January has been incurred wholly and exclusively for the lettings business and is claimable.

That, I think is as far as we can go now on the principle but in practice HMRC could challenge the pre-letting mortgage interest claim but if they did they would be looking to attach another purpose.

I would suggest that a challenge would be extremely unlikely for a void period of less than 3 months but you never can tell.

I suppose the longer the void period, the greater the chances of a challenge but the principle remains the same. What was the purpose of the expenditure?

jennifernil

Hi jimmo,

We are only looking at the mortgage interest here, nothing else. (though see below)

As discussed before, DD will not be claiming for the boiler replacement etc.

So we are looking at 4% interest on £88k from 4th January.

£88k being the amount she has borrowed against a value of around £160k.

It took a couple of months before the flat was redecorated, new boiler fitted, new flooring in some areas, and a few other tweaks.

Just wondering how much interest she can claim for. Very little income before 5th April, so, if she can claim the mortgage interest, a loss to carry forward presumably.

What about factor's (property manager's) monthly fees?

#2 and #3 seem contradictory.

jimmo

Hi jennifernil,

I wasn’t trying to resurrect the boiler issue so much as make the point that capital is capital and revenue is revenue.

In principle it doesn’t really matter how long the void period (the gap between her moving out and starting to let) is. If the sole purpose of the mortgage interest is for the lettings business then it can be claimed, well up to 7 years’ worth anyway.

Again in principle, it doesn’t really matter how derelict the property may have been. If the sole purpose of the mortgage interest is for the lettings business then it can be claimed.

In practice, the longer the void period the more likely it is that HMRC will come sniffing but if the claim is right the claim is right and can be defended.

I think your daughter should claim the mortgage interest from 5 January because that is the correct claim and, in the unlikely event that HMRC come sniffing, she will have a rock solid defence.

jennifernil

Thanks.

Any opinion on the factor's fees (£40pcm)?

jimmo

jennifernil wrote: »

Thanks.

Any opinion on the factor's fees (£40pcm)?

Sorry, yes I missed that but this now feels like a rhetorical question. What was the purpose of the expenditure?

Yes, claim it.