PIM2005 - Deductions: general rules: overview

This part of the manual gives only a broad outline of the trading expenses rules. For detailed guidance refer to the Business Income Manual.

Broadly speaking, in calculating property business profits a customer can deduct business expenses so long as they are:

  • incurred wholly and exclusively for business purposes,

and

  • not of a capital nature.

It is not possible to set out all the expenses that are allowable for tax purposes in every circumstance. In this part of the manual we aim to give some idea of the main types of expenses that are likely to arise in a property business and also some idea of what can or cannot usually be claimed as a deduction in calculating property business profits.

The guidance assumes that the property is let at a market rent and there are no unusual factors (see PIM2130).

Wholly and exclusively rule

Most of the trading expenses rules are applied to property income (see PIM1100 onwards). This includes the 'wholly and exclusively' rule which says that expenses cannot be deducted unless they are incurred wholly and exclusively for the purpose of the property business. This is covered in more detail in PIM2010.

Capital expenses

It is a general principle that capital expenses cannot be deducted in computing taxable profits. This applies to trades and property businesses as well as to other activities. Hence, for example, neither the capital cost of the property that is let nor the amount of any depreciation of the property can be deducted in computing taxable profits. Nor can a loss on the sale of a property or other capital assets be deducted.

There are special rules under the cash basis where specific capital expenditure is eligible for relief in calculating profits. See PIM1095.

The cost of ordinary expenditure on repairs can normally be deducted. Capital allowances may give relief for some capital expenditure: See PIM3010 onwards. Replacement of domestic items relief may also be available – see PIM3210.

In accountancy and tax practice, expenses that are deductible as an ordinary expense in computing profits are often called a 'revenue expense'. This is in contrast to a 'capital expense', which isn't deductible. But some revenue expenses will not be deductible anyway; for example, where they fail the 'wholly and exclusively' test (see above).

The capital expenses and repairs rules are explained in more detail in PIM2030.

Statutory rules: Income Tax (IT) cases for 2005/06 onwards and Corporation Tax (CT) cases for 2009/10 onwards

Section 272(1) of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA05) and S210(1) of the Corporation Tax Act 2009 (CTA09) provide that the profits of a property business are to be computed in the same way as the profits of a trade. The trading income rules in Part 2 of ITTOIA05 and Part 3 of CTA09 that apply for the purposes of computing the profits of a property business are set out in ITTOIA05/S272(2) and CTA09/S210(2), see PIM1103.

Landlord’s Energy Savings Allowance (LESA)

LESA allowed qualifying expenditure to be claimed on or after 8 July 2008 and before 1 April 2015. The archived guidance is available in PIM7070.