Deductions: main types of expense: legal and professional costs
Expenditure on professional fees of a revenue nature is deductible if they are incurred for the purposes of the rental business. Professional fees are not allowable if they are capital or they are not incurred wholly and exclusively for the purposes of the rental business. Generally, the fees are capital if they relate to a capital matter, such as the purchase of property.
The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.
The normal legal and professional fees incurred on the renewal of a lease are also allowable if the lease is for less than 50 years. But any proportion of the legal and professional costs that relate to the payment of a premium on the renewal of a lease are not deductible.
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. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.
If, however, the property concerned is put to some substantial use other than letting, such as occupation by the owner between lets, or where, say, a long lease replaces a short lease, the legal and other costs will be capital expenditure. In such circumstances, the expenditure is analogous to a physical alteration or improvement to the landlord’s capital asset.
Other examples of allowable legal and professional costs that may be incurred include:
costs of obtaining a valuation for insurance purposes,
the normal accountancy expenses incurred in preparing rental business accounts and agreeing taxation liabilities (see below),
subscriptions to associations representing the interests of landlords,
the cost of arbitration to determine the rent of a holding,
the cost of evicting an unsatisfactory tenant in order to relet the property.
Other examples of non-allowable legal and professional expenses include:
legal costs incurred in acquiring, or adding to, a property,
costs in connection with negotiations under the Town and Country Planning Acts,
fees pursuing debts of a capital nature, for example the proceeds due on the sale of the property.
Capital expenses may be allowable in computing any capital gain or loss on the disposal of the property. See the CG manual for further details.
Cost of taxation accounts and negotiations
Fees incurred on preparing accounts for commercial reasons and on many other accountancy services will meet the ‘wholly and exclusively’ test. Hence the cost can be deducted in computing rental business profits.
Strictly, any additional fees incurred for computing and agreeing the tax liability on rental business profits are not deductible. But, under a long-standing practice, normal recurring legal and accountancy fees incurred in preparing accounts or agreeing the rental business tax liability can be deducted.
This practice does not extend to fees incurred as a result of an enquiry by HMRC into the tax return if there is an amendment resulting from careless or deliberate behaviour. Neither does it extend to other personal fees; for example, fees incurred on preparing a tax return or working out CGT due.
For detailed guidance on the deduction of professional fees see BIM46400 onwards.