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.
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:
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.
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.
For detailed guidance on pre-trading expenditure see BIM46350.
Capital expenditure does not qualify for relief but there are also further special rules for capital allowances. Broadly they work in a similar way to those just outlined for revenue expenditure. Thus, for example, expenditure incurred on constructing a factory before the rental business begins may qualify for industrial building allowances once the building is in use for a qualifying purpose. For detailed guidance see the Capital Allowances manual.
