First time lease and agents' commissions

Hi. Starting a new thread to make sure I understood everything correctly. I have property income for 2022/2023. I rented out my property for the first time in March 2022, for 24 months and through a real-estate agency. The agency’s commissions correspond to a percentage of the rent I will be getting over these 24 months and, instead of paying them as a one-off, I pay them on a monthly basis (the agency deducts their fees from the rent each month). I read this manual (https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2120) and it says: “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.” However one of your colleagues told me that, as long as my real-estate agent’s commissions can be considered of a revenue nature based on the below paragraph, they can be deducted even if it is a first time rental: “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.” Could you please confirm this is correct? Thanks a lot

Hi,
 

Thank you for your question. Any expenses that relate to the rental property can be claimed. The only issue is that if you claim expenses that relate to capital matter then you would would not be able to claim these again when you sell the property against expenses to reduce any capital gain you may have incurred on the sale of the property.

Thank you . 

Thanks a lot for your answer. If I understand well, that means I can deduct/claim real-estate agents’ fees incurred in connection with the first letting or subletting of my property for more than one year, but then I would not be able to claim them against a capital gain when I sell the property, is that correct? Thanks a lot and have a lovely day

Hi,

You can claim the letting agents fees against the rental. The estate agent fees for buying or selling the property would then be against the gain if you sell the property. You can claim:

• Management fees paid to an agent for rent collection, advertising and administration. 
• Legal and professional fees for renewing a lease (if the lease is for less than 50 years).
• Professional fees paid to evict an unsatisfactory tenant in order to re-let the property.
• The costs of appealing against a compulsory purchase order.

 You cannot claim:

• Any costs for the first letting or subletting of a property for more than a year.
• The costs for agreeing and paying a premium on renewal of a lease.
• Any fee paid for planning permission or registration of title on property purchase.

Thank you.

Thanks a lot for your answer. I let my property for the first time in March 2022, with a 2 years’ lease. I am paying my agents’ commission for this first letting over 2 years, meaning instead of taking their commission upfront they spread it over the term of the lease and take a percentage of the rent each month. Are those considered “costs for the first letting or subletting of a property for more than a year, and therefore non deductible? This is how I first understood the below, but one of your colleagues told me they were deductible so I am a bit confused: “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.” Thanks a lot

Hi,
PIM2120 means to show the differences between capital and revenue expenditure, which means in terms of the statement quoted regarding capital expenditure, it touches upon such expenses as legal fees when purchasing the property, whereas the expense you have incurred for Agents commission could be deemed as a revenue expense as it was incurred wholly and exclusively for the rental business.
Other expenses such as costs for drawing up the lease and viewings would be deductible, however, surveyors costs in the sense of purchasing the property would be non-deductible as this would be a capital expense.
The latter may be claimed later if/once the proeprty is sold within Capital gains expenses. 
Thank you.

Thanks a lot for your answer, I understand now, there has been a confusion between what can be deducted for rental and for capital gains. Does that mean that the commissions of the real estate agents for the first 2 years I rented out the property can be deducted form my rental income, or not? Thanks a lot for your help

Hi,
Any expense that is wholly & exclusively incurred in the running of your rental business would be a revenue expense .
So if claimed as a revenue expense could not be claimed as a Capital Expense on the sale of the property.
Thank you

Thanks a lot. So I can deduct the commissions of the real estate agents for the first 2 years I rented out the property from my rental income, right? That just means I wont be able to deduct them again as a Capital Expense on the sale of the property, is that correct?

Hi Stephanie Duprat,
The costs of the real estates agent, who is managing your rental property, can be set against the gross rental profits.
The estate agents costs incurred in disposing of a property would be set against the capital gain.
Thank you. 


 

Thanks a lot, this is very clear, I will therefore deduct the commissions of the real estate agents for the first 2 years I rented out the property from my rental income. Have a lovely day

Hi Stephanie, My understanding is that capital expenditure is anything associated with the purchase of a property and anything that is making a marked increase on the property value eg. upgrading kitchen worktops. Everything else is an expense and deductible in the current years accounts. However I am not an accountant and you should get advice on this issue. I use a letting agent in southport that helps me with this sort of thing. 

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