Thank you for your response. I appreciate you are trying to get the response out quickly but I do find it slightly galling that your reply contains so many typos - it leaves me with the impression that you have not really spent enough time properly considering all the issues.
Anyway, I have looked at the link you kindly provided and am somewhat confused. I have copied below what I believe to be the section you are referring to (marked in italics):
Interest payable on property only partly used for rental business
A property may be let for short periods in a tax year or only part of it may be let throughout a tax year (or both); the rest of the time the property is used for private or non-business purposes. Here the interest charged on a qualifying loan on that property has to be split between the rental business use and the private or non-business use. The split is done in whatever way produces a fair and reasonable business deduction, taking account of both the proportion of business use and the length of business use.
You don’t have to split the interest if the taxpayer is genuinely trying to let the property but it is empty because they have not been able to find a tenant. In this case the interest will meet the “wholly and exclusively” test. It won’t meet this test if they have not been trying to let the property or they have been using it for private or non-business purposes .
As far as I can see, this rule relates to a split between private or non-business purposes and business purposes. Now, it may be that there is a further HMRC manual extract that defines refurbishment of a rental property as non-business purposes, but I find it hard to see this point as the refurbishment was carried out solely for the purpose of improving the business asset and thus increase the rent or, in some cases, enabling rent (where the property could not be occupied without being refurbished). My view is even stronger where FHLs are concerned, as this is viewed by HMRC in a similar fashion to any other business, evidenced by the fact that one is entitled to roll-over relief and entrepreneurs relief on disposal of the asset.
From my reading of this extract I cannot see how refurbishing a property for the whole purpose of improving the business asset can be viewed as a non-business purpose. Perhaps you would be able to give me further evidence to support your view - a test case reference maybe, or further HMRC manual reference?
I would also like some further information on your answer:
"The actual capital improvements such as new kitchen or bathroom and associated costs are however permitted against the capital gain position but general repairs are not until such time that you have a tenant in situ with the normal rental position and with FHL - then once you are up and running with avilable lets (and they fulfil the FHL remit for the whole of that tax year)"
From my reading of your answer (which is somewhat ambiguous), it is implied that general repairs can be offset against the capital gain once a tenant is in-situ. Please confirm whether or not this is actually the case, as I was under the impression that maintenance and repairs could never be set against the capital gain, rather always against rental income.