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Sam
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Category: Tax
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I am a property investor and I have some properties

Customer Question

I am a property investor and I have some properties that fall under the HMRC description of furnished holiday lets and others that are straightforward rental properties. All properties that I buy will, at some stage, have fairly extensive refurbishment undertaken. My question relates to the interest on the mortgage relating to each of these properties during the refurbishment, during which time they are uninhabitable. I believe that I should be able to offset the interest payments during this time against the capital gain if I ever sell these properties. Please confirm if my view is correct or not, and point me to the relevant sections in HMRC rules/notes/guidance etc for a) Properties refurbished some time after I have bought them, ie ones that have been rented and then remain unrented for a period while I am refurbishing. b) Properties which are uninhabitable when I buy them therefore the refurbishment is a pre-requisite to renting the property Regards ***** *****

Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.

Hi Rupert

Thanks for your question - I am Sam and I am one of the UK tax experts here on Just Answer.

In answer to your questions and view I am afraid you are incorrect and to answer your more specific questions raised.

a) Properties refurbished some time after I have bought them, ie ones that have been rented and then remain unrented for a period while I am refurbishing.

No, as there has to be rental income arising on which the mortgage interest can be offset agaisnt
b) Properties which are uninhabitable when I buy them therefore the refurbishment is a pre-requisite to renting the property

No, as they do not become viable eaners of rental income until such time they are avilable and occupied with a tenant or holiday let so they are neother available to offset against the rental income or are an allowable capital expenditure allowable against the capital gains position.

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)

I am sorry the new si not more favourable, bit this has never been the case with interest element of the loan/mortgage repayments - there has to be income to offset it - and it is NEVER applied against the capital gain as this looks at the sale and purchase price and the mechinism on which the purchase has been made has no bearing on that factor.

I have added the link here - and the key factor is whilst you refurb (beginning or end) you at that time, do NOT meet the wholly and exclusively requirement as its NOT available to let due to the work being carried out on it, once its finished and you advertise to let = then that time is allowable (even if its 2 months later you get a tenant or holiday let)

See PIM2105 http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm

Let me know if you wish to follow up on the answer provided

Thanks

Sam

Expert:  Nicola-mod replied 1 year ago.
Hello,
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Customer: replied 1 year ago.

Dear *****,

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.

Regards

Rupert XXXXXXXX

Expert:  Sam replied 1 year ago.

HI Rupert

I agree about the dreadful spelling - for which I can only apologise - the system is meant to do a spell check - which I rely on more than most, due to my health issues, so I am so very sorry.

And I can assure you - my inability to recognise that the spell check has not picked up my typos, in no way alters the fact that I am an expert and have answered your question with careful and considered expertise!

And the key factor here is when a property is not with a tenant in situ and this is due to it being refurbshed (whether pre let or during a change of let) it is not available to let out - and its on this basis that the interest element of the mortgage payment is not allowable.

General repairs in their own right - are only ever allowable against the rental income and you have to have a tenant in situ for this also to be an allowable expense but when a capital improvement is undertaken such as the installation of a new bathroom or kitchen - then this (along with the related repairs - such as new tiling and decoration etc) can ONLY be offset against the capital gain.

So I do not see how my response where I state

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 available lets (and they fulfil the FHL remit for the whole of that tax year)"

Leads you to beleive that I am stating that it is implied that general repairs can be offset against the capital gain once a tenant is in-situ - thats not what it states at all

It states

actual capital improvements such as new kitchen or bathroom and associated costs are however permitted against the capital gain position

which clearly advises what has to be offset againt the capital gain position at the time of sale and then also states

but general repairs are not until such time that you have a tenant in situ with the normal rental position

which advises that general repairs are only EVER reclaimable againt the rents received (so you would have to have a tenant in situ for these to be an allowable expense at all but have no bearing AT ALL on the capital gain position!

Thanks

Sam

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