We have received another interesting article from the accountants Howard Worth which is all about the potential costs of dealing with problem tenants.
1. Legal Costs
These are not always allowable. They may relate to the acquisition or disposal of property, in which case they are a capital cost and deductible only for Capital Gains Tax (CGT) purposes when that property is sold. Strictly, every new lease is a capital cost and not allowable, although renewals of ‘short’ leases (of less than 50 years’ duration) are normally allowable.
However, HMRC’s Property Income manual (at PIM2205) advises that: ‘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’ (emphasis added). In effect, a replacement lease on similar terms is treated as if it were a renewal of an existing lease. PIM2205 also confirms that the cost of evicting an unsatisfactory tenant in order to re-let the property is also tax-deductible.
2. Repairs to a property
Repairs to make good damage caused by a tenant are an allowable expense. This holds good whether the damage amounts to normal ‘wear and tear’ or something far worse. Basically, whatever is required to bring a property back to the standard it was in when it was first let is an allowable repair. It is only when works improve the property to a higher standard (such as extensions, or using higher-quality fixtures) that relief is denied, to be claimed for CGT only when the property is sold – provided the improvement is still there, of course.
3. Expenditure incurred while a property is empty
This is still allowable, provided the landlord still wants to let the property.
Case Study: Problem Tenants
Sanjay has a single property, which he has let for several years. His previous tenants have left after a couple of years, and he takes the opportunity to re-decorate the property, and to replace the kitchen on a like-for-like basis. He then takes on the Simpson family as tenants. They provide a £500 deposit, and all is well.
Within a few weeks, however, neighbours report to Sanjay that the Simpsons – and particularly the son, Bart – are becoming a nuisance. The house is noisy late into the night, with frequent visitors and parties. Bart has apparently turned the front garden into a skateboard park. Sanjay is horrified when the letting agent’s scheduled visit reveals the following:-
- The property’s front lawn has in fact been dug up and converted into a rudimentary skate-park; the rear garden has been turned into a giant mud-pen for the family’s pet pig. It would cost £1,500 to clear, re-turf and to re-bed both front and rear gardens.
- The walls in the front bedroom (presumably Bart’s) have been damaged, with the wallpaper and even the underlying plasterwork in some areas needing replacement. Based on the markings on the wall, someone has been playing football inside the house, probably there’s no room in the garden any more. It will cost £500 to re-plaster the room and replace the wallpaper.
- The newly-fitted kitchen has been badly damaged, with scratched surfaces, missing doors and the integrated microwave is missing. The kitchen would cost £5,000 to re-instate, including the integrated appliances.
Needless to say, Sanjay is not amused. He has insurance which will cover the structural damage to the property, but the insurers will not cover the lawns, arguing ‘aesthetics’. There is an excess on the insurance policy of £500. Sanjay instructs his solicitors to set about evicting the Simpsons as unsatisfactory tenants. He realises that this will be expensive but he sees no other course of action – the neighbours are complaining that the skate-park is turning into a major attraction for kids from all over the area, and Bart has apparently started charging an entrance fee!
Surprisingly, Sanjay’s solicitors are delighted, since the tenancy agreement explicitly forbids any unapproved commercial activity at the property, and immediately commence proceedings.
After several more months and thousands of pounds in legal fees, Sanjay finally recovers possession of his property. The House is in a parlous state, and will need re-decorating throughout. The bathroom will now also need replacing. The boiler and most of the copper piping in the property have disappeared. Thankfully, the electrical wiring seems still to be sound, once the arc lights overlooking the front garden/skate – park have been removed. Given that the plasterwork in other rooms is also showing signs of wear and tear, Sanjay decides to pay for the entire house to be re-plastered.
Schedule of Costs and Works
In this exaggerated example there are many different costs to consider (different legal costs replacement and re-plastering, garden works/ on-going costs whilst unlet) with the relevant tax considerations.
For further information on how Howard Worth can assist with your personal situation, please contact Mike Doherty on firstname.lastname@example.org or 01270 626162.