Profits from UK land or property are treated for tax purposes arising from a business. The broad principle is that rental business profits are computed using the same principle as for trade. Expenses are allowable if they are incurred wholly or exclusively for the rental business.
Usually a rental business begins when first letting commences. Allowable revenue expenditure incurred before the rental business started can be relieved under the provisions for pre-trading expenditure, as long as it is incurred wholly and inclusively for the purpose of the business and is not capital.
Thus for example – council tax on property could be allowed under the above rules if it is due before the property was first let.
Qualified pre-letting expenditure is treated as incurred on a day in which the taxpayer first carried on their rental business. So any repairs carried out before the letting starts can be deducted from the first years gross rents. However whether something is capital or revenue is a difficult area. In one case HMRC vs Law Shipping Ltd, pre-letting expenses were disallowed because the asset (the ship) was in a defective state and could not be used until the repairs had been undertaken thus such work was of a capital nature.
In another case Odeon Associated Theatres Ltd vs Jones where the dilapidated state of the cinema was due to accumulation of necessary repairs, deduction was allowed. Although in both cases the purchased assets were in poor condition there are two different distinguishing factors between the cases. With the ship, it was in a poor condition that had to be repaired before it could be used whilst with the theatre it could have been used albeit in a poor state of repair.
Other factors which could be taken into consideration to determine whether it is capital or revenue would be whether the purchase price is substantially lower to reflect the poor state of the asset and whether the asset can be used shortly after acquisition without being repaired.