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HMRC internal manual

Property Income Manual

HM Revenue & Customs
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Deductions: general rules: introduction


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

  • incurred wholly and exclusively for business purposes,


  • 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 rental business and also some idea of what can or cannot usually be claimed as a deduction in calculating rental business profits.

The guidance assumes that the property is let at a market rent and there are no unusual factors (see PIM2220).

This guidance applies equally to CT Schedule A as from 1 April 1998.

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

Wholly and exclusively

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 business purposes.

All the evidence has to be considered in determining whether an expense was laid out wholly and exclusively for business purposes. The evidence may include documents, agreements, notes of meetings and any other records. What the taxpayer says was their purpose in incurring the expense is part of the evidence but it isn’t necessarily decisive: the facts may point to another purpose. For example, suppose the taxpayer lives in London but has a holiday cottage in Wales. The cost of going down there for a three week family holiday is unlikely to meet the ‘wholly and exclusively’ test even if the taxpayer says their purpose in going was to inspect the property prior to third-party letting later in the year.

For an expense to qualify the business purpose must be the sole purpose. A non-business or private purpose prevents any deduction from business profits where there is no objective yardstick by which any business element can be distinguished from the non-business element.

But where a definite part or proportion of an expense is wholly and exclusively incurred for the purposes of the business, that part or proportion can be deducted. An example is the revenue running costs (including standing charges and hire-purchase interest) of a car or van used partly for business and partly for private purposes. For example, if 20% of the mileage in their car is business mileage, a taxpayer can deduct 20% of the costs of the car, including standing charges. For more about travelling see PIM2210.

Another example is the cost of rates, lighting and heating of premises used partly as business and partly as private accommodation, see PIM2050.

Payments made by a partnership towards the personal or domestic expenses of a partner are disallowable because they fail the wholly and exclusively test.

Capital expenses

It is a general IT principle that capital expenses can’t be deducted in computing taxable income. This applies to trades and rental 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.

But the cost of ordinary expenditure on repairs can normally be deducted. In addition, separate tax allowances give relief for the depreciation of some capital assets. See PIM3000 onwards.

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 andexclusively’ test (see above).

The capital expenses and repairs rules are explained in more detail in PIM2020.

Statutory rules - IT cases to 2004-05 and CT cases

ICTA88/S21A (2) provides for Schedule D Case I & II rules to be used for the new Schedule A. It directs that the statutory rules in Part IV Chapter V of ICTA88 apply in computing the profits or gains, or losses, of a Schedule A business as they do for a trade under Schedule D Case I, unless there is express provision to the contrary. Part IV Chapter V includes ICTA88/S74 - S99. The four rules that are specifically excluded are covered at PIM1104.

The statutory basis for the use of Case I rules and commercial accounting principles is covered more fully in PIM1100 onwards.

In applying the provisions of Part IV Chapter V you should interpret the legislation for Schedule A purposes as if it read ‘Schedule A business’ instead of ‘trade, profession or vocation’ or ‘trade’.

For example, the most familiar Case I rule is ICTA88/S74 (1)(a) that an expense may not be deducted unless it is wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation. For a Schedule A business, the rule becomes that an expense may not be deducted unless it is wholly and exclusively laid out or expended for the purposes of the Schedule A business. There is more about this rule in PIM2010.

IT is, of course, a tax on ‘income’. This principle and the use of commercial accountancy rules lead to the second leg of the test, that capital expenditure is excluded. For CT cases, ICTA88/S9 (1) provides that amounts to be taken into account as income shall be determined ‘in accordance with IT law and practice’.

Statutory rules – IT cases for 2005-06 onwards

ITTOIA05/S272 (1) provides 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 that apply for the purposes of computing the profits of a rental business are set out in ITTOIA05/S272 (2) - see PIM1103.