Tax return question on rental property

curtis122

Due to changes with rental property fees, I just want some clarification on the "Legal & Management and other professional fees" field. Now as the landlord takes on more of the fees on setup I'm not sure 100% what's allowed. I've watched the Video by HMRC and it states for that section 'Expenses not allowed - First letting or sub letting costs' but on the info/help on the actual tax return it states -

"Management fees paid to an agent to cover rent collection, advertising and similar administrative expenses can be deducted.
You cannot deduct:

expenses incurred in connection with the first letting or subletting of a property for more than a year. These include legal expenses such as:

• • the cost of drawing up a lease
  • agents' and surveyors' fees and commission
• any costs of agreeing and paying a premium on renewal of a lease
• fees for planning permission or registration of title on property purchase
• 
  

Its the bit in bold that is making me question it as I get charged now when a new tenant moves in a fee of £400 that comes under "Lease setup" on my invoice from the management company but the lease gets setup for 1 year (in fact it may even be for 6 months but I would have to double check with the Management company) either way not "more than a year" as the help states.

I normally put in this section the management companies commission they take each month as they charge this for rent collection, admin etc and there used to be a payment listed as 'Rent Guarantee charge' that was a one off payment when a new tenant moved in but this £400 charge is now obviously all these extra fees now charged to the landlord rolled into one payment when a new tenant moves in but surely this can be classed as 'Management fees' also?
Does this mean I can include it under this section or not?

Jeremy535897

The exclusion can only apply to the first tenant you grant a tenancy to in a particular property, not subsequent tenants.

curtis122

So if I reading what your saying correctly I can put this £400 on my tax return for this first tenant but if he moves out in 6 months and I get another tenant and get charged the £400 again I can't add it again so therefore will be putting £800 in this tax year? Or is it the other way round or am I just getting confused?!!!!

tacpot12

To clarify, if the tenancy agreement is for more than 1 year (e.g. 1 Year + 1 day), then you cannot deduct the lease setup fees you pay as expenses, but you can deduct any such fees paid subsequently. If you have let the property for 1 year or less, you can deduct the lease setup fees immediately, and can continue to deduct them. 

oldbikebloke

where the legal fees are deemed to relate to a lease which is a capital cost because it is for a "long" period, then those fees cannot be claimed as a revenue expense. 

Q: first ever let? A: yes >
Q: more than 1 year?
A: No = legal fees can be claimed 
A: Yes > 1 year: fees cannot be claimed as revenue costs 
Q: Is it not first ever let? A: Correct, it is not the first ever let, it is a subsequent let: > fees can be claimed if letting is <1 year (and meets other conditions re interim use) ...  read this for full details: 

PIM2120 - Property Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)
The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.

oldbikebloke

curtis122 said:

So if I reading what your saying correctly I can put this £400 on my tax return for this first tenant but if he moves out in 6 months and I get another tenant and get charged the £400 again I can't add it again so therefore will be putting £800 in this tax year? Or is it the other way round or am I just getting confused?!!!!

no, you are confused

where the legal fees are deemed to relate to a lease which is a capital cost because it is for a "long" period, then those fees cannot be claimed as a revenue expense. 

Q: first ever let? A: yes >
Q: more than 1 year?
A: No = legal fees can be claimed 
A: Yes > 1 year: fees cannot be claimed as revenue costs 
Q: Is it not first ever let? A: Correct, it is not the first ever let, it is a subsequent let: > fees can be claimed if letting is <1 year (and meets other conditions re interim use) ...  read this for full details: 

PIM2120 - Property Income Manual - HMRC internal manual - GOV.UK (www.gov.uk)
The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.

curtis122

I think I'm getting confused when it keeps talking of 'First Letting' and it being over a year. When it talks of 'First Letting' does that mean first ever let of the property when you first buy a property to rent out?

Maybe it will make it easier for someone to explain in more laymans terms if I explain my situation which is -
I have 1 property had it 16 years, in that time multiple tenants where most have stayed more than a year. Early this year a new tenant moved in and I got charged this new fee of £400 by the Management Company. So he is a new tenant on a 1 year tenancy agreement to start but obvioulsy he may stay for years after that.

Jeremy535897

"The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.
...

Where a replacement lease follows closely on a previous one, and is in broadly similar terms, a change of tenant will not normally make the associated legal and professional costs disallowable. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.

If, however, the property concerned is put to some substantial use other than letting, such as occupation by the owner between lets, or where, say, a long lease replaces a short lease, the legal and other costs will be capital expenditure. In such circumstances, the expenditure is analogous to a physical alteration or improvement to the landlord’s capital asset."

What this means is:

If you buy a new property and incur expenses on the first lease, you cannot claim them, if the lease is over one year.

If you extend the lease, or let the same property to a new tenant, you can claim the expenses relating to this new lease unless the lease is over a year and something significant has happened, like a period of owner occupation in between, or a significant change in the type of lease, and the new lease is for more than a year. In the case you quote, the new lease is for more than a year, but unless it is on very different terms to the earlier lease, and/or there was a substantial break period in between the leases (owner occupation, major renovation etc), you can claim a deduction for the £400.

tacpot12

curtis122 said:

I think I'm getting confused when it keeps talking of 'First Letting' and it being over a year. When it talks of 'First Letting' does that mean first ever let of the property when you first buy a property to rent out?

Maybe it will make it easier for someone to explain in more laymans terms if I explain my situation which is -
I have 1 property had it 16 years, in that time multiple tenants where most have stayed more than a year. Early this year a new tenant moved in and I got charged this new fee of £400 by the Management Company. So he is a new tenant on a 1 year tenancy agreement to start but obvioulsy he may stay for years after that.

So in laymans terms, you can always claim the lease setup fee, as only the first letting costs are disallowed and only if the first letting is for more than 1 year. Your first letting was 16 years ago, so you may have claimed the expense when you were not entitled to then, but HMRC will not address this issue as it was so long ago and it was for such a small amount of money (especially as 16 years ago, the tenant would have been paying for some of fees that are wrapped up in the lease setup fee.) 

oldbikebloke

the point you seem to not understand is that at the point of issue of a tenancy agreement, is that agreement for a duration of more than 1 year. Yes or No?
if it is for 1 year, that is not more than 1 year !

the fee restriction applies only if for more than 1 year 

also it is not just the first letting, there are specific circumstances which mean fees can be disallowed on subsequent lettings if, as explained in the full text I asked you to read, there has to be a SIGNIFICANT change in circumstances between one tenant ending and a new one starting. Clearly significant change is an exceptional event so in most cases, for a newly issued tenancy agreement with an initial term of up to (but not longer than) 1 year, the fees are claimable. Once that term has ended then as you know, the tenancy will:
- either end
- or continue.

If it continues that may either be because a new contract has been issued (same rule applies: is it 1 year or less duration) or the tenant has "rolled over" on to a periodic tenancy. The latter is not a new agreement, but nor does it negate the fact the duration of the initial contract was what determines if the fees can be claimed or not (ie was it for up to 1 year or not?). If the tenant lives there for 20 years, of which 19 were under a periodic tenancy, then the original contract was not for more than 1 year, so its fees can be claimed. 

curtis122

The Tenancy agreement for any new tenants is never raised for more than one year initially. Like I said my main confusion what the 'First Letting' I just need some further clarification on that which I now have thankyou.

 I did read what you sent but as normal with HMRC you sometimes need further clarification on the explanation that they give you given how they word things. You sometimes need a more simplified explanation of the explanation. I did understand the significant change and there has been none.