BIM41015 - Receipts: rents: letting surplus accommodation: rents may be treated as trading income

If the law were strictly applied (see BIM41001) it would mean that rent received from letting surplus business accommodation, and the related expenses (see BIM41010) would have to be separately identified in each and every case, even where there would be no overall effect on the ultimate tax liability.

To avoid the need to apportion outgoings on accommodation that is partly used for a trade and partly let, between the trade (or profession) and the rental business, there should be no objection in practice to rents receivable being included as trading income where all the conditions below apply.

1. The accommodation is temporarily surplus to current trade requirements.

In other words, the accommodation must previously have been used or intended to be used in the trade. Also, treatment as trading income is not appropriate where it is evident that the premises have become surplus to trade requirements other than temporarily.

2. The individual premises are partly used for the trade and partly let.

As noted above, the inclusion of rents as trading income avoids the need to apportion outgoings on the premises between trade and property expenses. The treatment cannot be applied to whole buildings that are let because there is no question of any apportionment of expenses being necessary.

3. The rental income is comparatively small.

Where a substantial amount of rent is receivable the strict basis should be applied because otherwise the tax liability resulting may not approximate to the strict statutory liability.

4. The rents are in respect of the letting of surplus business accommodation only and not of land.

Rents receivable in respect of periods commencing on or after the date when the trader ceases to occupy any part of the premises for the purpose of the trade should be excluded from the computation of trade profits and dealt with separately.

Legislation – IT cases from 2005-06

This practice has been legislated for IT payers in ITTOIA05/S21.

In particular Section 21 sets out rules for determining whether the accommodation is temporarily surplus to requirements. These are:

• that the accommodation must have been used for the purposes of the trade within the last 3 years (or acquired within that period);
• that the accommodation must be let for a term of not more than 3 years; and
• that the trader must intend to use the accommodation for trade purposes at a later date.

If all the conditions are satisfied, the taxpayer can decide whether the rents from the letting of surplus business accommodation are included in the computation of trade profits or rental business profits. But if the decision is made to include them in trade profits, then this treatment must continue as long as the conditions are satisfied.

If accommodation is temporarily surplus to requirements at the beginning of a period of account, it continues to be temporarily surplus to requirements until the end of that period.