Cash basis & First letting - are legal and agent's fees deductible?

Hello, Hope you are well. As the landlord of a shop, I have just rented it out to a new lessee for 10 years. For the new commercial lease, legal and agent's fees have been incurred. I have read that, given the lease is for more than a year, these fees are capital in nature and hence not deductible. However, I report on "cash basis", instead of accrual accounting, are these fees allowed to be deducted in my next tax return? Thank you in advance.

Hi 

Calculating profits or losses of a trade using the cash basis does not usually affect the types of expenses which are allowable.  
Please see PIM1094.   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), agents’ and surveyors’ fees and commission.  
So no the fees would not be allowed as a deduction in your next tax return.  Please see PIM2120.

Thank you

Hi, Thank you for the response. Just a follow-up question. How should I read PIM1095, which states that "under the cash basis, deductions are allowed for capital expenditure, with extensive exceptions"? The provisions specifically lists out capital expenditure that are not allowed under the cash basis, which does not seem to include legal and agents' fees for lettings to a new lessee. Could you please kindly advise? "As capital expenditure can generally be relieved in full as a deduction when calculating the profits of a property business under cash basis, capital allowances are not available in respect of capital expenditure." I certainly do not want to incur a higher CGT in the future... Thank you in advance. (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1095)

Hi,
Thank you for your question. Expenditure on professional fees of a revenue nature is deductible if they are incurred for the purposes of the rental business.
The expenses incurred in connection with the first letting of a property for more than one year are capital expenditure and therefore not allowable.
The expenses include, for example, legal expenses (such as cost of drawing up lease), agent’s and surveyor’s fees and commission.
Expenses for a let of a year or less are deductible.
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.
Further information is available at:
PIM2120 - Deductions: main types of expense: legal and professional costs
Thank you.

Hi, Thank you for the response - much appreciated. As per my first post, I completely understand that legal and agents' fees are of a capital nature - agreed. What I want some clarifications on is, under the cash basis, on which I report on my tax returns, are these fees deductible according to PIM1095? The provisions in PIM1095 state that under the cash basis, deductions are allowed for capital expenditure. Please kindly advise. Thank you in advance.

Hi , 

Thank you for your question.  PIM2120 specifically deals with  'Legal and Professional Costs'. As outlined in this guidance the expenses incurred in connection with the first letting or subletting of a property for more the one year are capital expenditure and therefore are not allowable. PIM1095 deals with other capital expenditure some of which are allowable but legal and professional costs are not covered by this guidance as it is covered in PIM2120. Thank you .