PIM4300 - Rents related to a trade or profession

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

Trading premises - rents of surplus part let

A trade or profession may include rents from temporarily surplus trading or professional accommodation in the trading or professional profit or loss computation.

If the taxpayer carries on a trade or profession and has such surplus accommodation that they let, they can, if they wish, treat the rent they get for it as a trading or professional receipt. This can only be done in the following circumstances:

• the accommodation must be temporarily surplus to current business requirements,
• the premises must be used partly for the business and partly let; in other words, rents from a separate property which is wholly surplus must be dealt with as property income,
• the rental income must be comparatively small (since otherwise, the tax liability resulting may not approximate to the strict statutory liability),
• the rents must be in respect of the letting of surplus business accommodation only and not of land.

Receipts from the letting of surplus business accommodation are treated as trading income and will not form a part of the taxpayer’s rental business (provided they meet the conditions set out above). Any expenditure on the surplus accommodation is deducted in the computation of the trading or professional profits and must be excluded from their rental business.

This practice has been legislated in ITTOIA05/S21 for IT cases for 2005-06 onwards.

Separate property surplus to requirements of the trade

The taxpayer may carry on a trade or profession in which a separate property becomes surplus to their trading or professional requirements. If they don’t sublet the property, they can usually deduct the rent and other expenses of that property in computing their trading or professional profits. The test is whether they undertook the rental obligations etc of the surplus property ‘wholly and exclusively’ for the purposes of their trade or profession, (Hyett v Lennard [1940] 23TC346).

Normally, the test would be met if the taxpayer entered into the lease in order to use the property in their trade or profession. But the expenses of a private property or a rental business property wouldn’t meet this test. Nor would the expenses of a former trading or professional property where, after it became surplus:

• the taxpayer renewed the lease, perhaps because they wished to continue subletting, or
• the taxpayer didn’t exercise an option to terminate the lease that was available; for example, by giving notice to the landlord.

If the taxpayer sublets the surplus property (and the expenses are deductible in computing the profits of their trade or profession) the position is:

• strictly, any rents etc they receive are taxed as rental income with no deductions for those expenses which qualify as expenses of the trade or profession, since the ‘wholly and exclusively’ test isn’t met for the rental business; but they can, if they wish, deduct those expenses in the rental business instead of their trade or profession so that only the net profit is charged as property income,
• any excess of expenses over receipts from the surplus property can be deducted in computing the profits of their trade or profession, provided the expenses meet the ‘wholly and exclusively’ test (see above).

Expenses of let properties held as trading stock

The taxpayer may be a property dealer or developer who holds property as trading stock. The running costs of that property while awaiting sale (such as maintenance or background heating) will be expenses of their trade as a property dealer or developer. They can’t deduct those expenses in any rental business they also carry on.

The taxpayer may temporarily let the property they hold as trading stock while awaiting a buyer. Here the rental receipts will fall into their rental business, or will create one if they did not already have one. Then:

• Any revenue expenses of the letting of the trading stock must be deducted, in the first place, from the letting receipts.
• Any net profit will be part of the rental business result.
• Any excess of letting expenditure of the trading stock over the rental business receipts is an expense of their property dealing or developing trade.

In some cases the taxpayer may buy a property, such as a block of flats, and then buy out the tenants over a period with a view to selling on the whole block. In this case they will need to separate the expenses of the let flats from those they no longer intend to let and which therefore cease to be part of their rental business. Following the principles already outlined; the expenses of the unlet flats can only be deducted in computing the property dealing profit or loss.

Tied premises

Rents from tied premises are wholly trading receipts and do not form part of the rental business. The same applies to the taxable amount of any premium received. Any expenditure on the tied premises will be deducted in the computation of the trading profits and should similarly be excluded from the rental business. See:

• ICTA88/S98 (CT cases and IT cases up to 2004-05), and
• ITTOIA05/S19 (IT cases for 2005-06 onwards).

Caravan sites

The proprietor of a caravan site may carry on material activities associated with the operation of that site which amount to trading. If so, receipts of that trade can include any receipts from letting caravans even though the letting does not, of itself, amount to a trade. Such receipts will not, therefore, be part of the letting business and nor will the associated expenses. See:

• ESC/B29 (CT cases and IT cases up to 2004-05), and
• ITTOIA05/S20 (IT cases for 2005-06 onwards).

Hotels and guest houses

Profits from running hotels and guest houses are taxed under the rules for trades and are not part of a rental business.

Letting property and providing additional services

Where the taxpayer lets property and provides additional services to the tenants it is a question of fact whether:

• the whole activity (the letting of property and the services) amounts to a trade, or
• the whole activity is part of their rental business, or
• the provision of services amounts to a trade that is separate from their rental business.

Case law

The separation of property income from trading income is a long established principle in UK tax law. In Salisbury House Estate Ltd v Fry [1930] 15TC266, Lord Atkin said:

'... the schedules are mutually exclusive; the specific income must be assessed under the specific schedule' (p.319).

and Lord MacMillan said:

'A landowner may conduct a trade on his premises, but he cannot be represented as carrying on a trade of owning land because he makes an income by letting it.' (p.330).

Lord MacMillan goes on to raise the possibility that a landowner may be providing services which are a separate trade.

The principle of Salisbury House Estate Ltd v Fry [1930] 15TC266 has often been applied by the courts subsequently. See for example Griffiths v Jackson [1982] 56TC583 where there is a useful review of the authorities.

Although property income is now computed like trading income, letting is still not a trade.

Whole activity a trade

The whole letting activity will only constitute a trade where the owner remains in occupation of the property and provides services over and above those usually provided by a landlord. The provision of bed and breakfast, for example, is clearly trading. Essentially the distinction lies between the hotelier (who is carrying on a trade) and the provider of furnished accommodation (who is not). An important difference is that in a hotel etc. the occupier of the room does not acquire any legal interest in the property.

Whole activity part of a rental business

To run a separate trade of providing services (in addition to their rental business) the taxpayer needs to show that what they offer goes well beyond the services normally provided by a landlord. Examples of services normally provided by a landlord include:

• the cleaning of stairs and passages in multi-unit premises,
• the provision of hot water and heating,
• supervision involving rent collection and arranging new tenancies,
• arranging for repairs to the property.

The fact that the taxpayer provides any or all of the services listed in the previous paragraph does not mean that their whole activity is a trade or that any separate earnings from those services arise from a trade. The receipts are part of their rental business. Where the taxpayer has a large rental business they may need to work full time in order to provide these services; but that doesn’t change their nature - it is just a result of the number of properties they own.

Separate trade in addition to rental business

The taxpayer may, however, carry on a separate trade where they provide the following services:

• the regular cleaning of rooms when they are let and not just between changes of tenant,
• the regular supply of clean linen,
• the regular provision of meals.

The provision of these services does not, however, make the whole rental business a trade.

The taxpayer’s receipts from the trading services are taken into account in calculating a separate trading profit and the rents they get for letting the property are included in calculating their rental business profits. Where they get a single payment for the two separate activities they will need to split it for tax purposes. They should do this on a reasonable basis that reflects the value of each activity.

The taxpayer’s expenses will similarly need to be split between their trade and their rental business.

Are the services normally provided by a landlord?

If the provision of services is to be treated as a separate trade, then those services would have to go beyond those which landlords normally provide. See above for examples of the kinds of services that landlords commonly provide, and also examples of services they do not commonly provide. If regular meals are provided, it may be more likely that the whole activity is a trade, including the letting element.

It is not conclusive, but it is more likely to be appropriate to treat the services as being provided in the course of a separate trade if there is a separate charge for them. But this would not necessarily be the case, especially if the tenants have no option to pay the rent only, and do without the services and the service charge.

An Inspector should deal with any question as to whether an activity involving letting furnished accommodation is a trade or a rental business. Where you cannot agree the correct head of charge, and the matter seems likely to proceed to a contentious hearing, consult CT&VAT (Technical) before you list an appeal for hearing.