Our subscriber converted a commercial property to flats which he intends to let, but he’s now received an unexpected bill from his local authority for the community infrastructure levy (CIL). Is the tax deductible from his rental income?
What is the CIL?
The community infrastructure levy (CIL) was introduced in 2010 as a means to help local councils fund the extra local services that are required when commercial or residential structures are created or extended.
It doesn’t apply to buildings where the additional floor space created is no more than 100m2 , unless it’s a new dwelling. Local authorities aren’t obliged to charge the levy, but if they choose to they must include information about it on their website, e.g. the rate of charge and any exemptions.
Indirect tax consequences
HMRC accepts that the CIL, which is a one-off charge, is neither a supply of goods nor of services by local authorities making the charge and therefore they should not add VAT to the levy. The direct tax consequences of the CIL are less clear.
Letting your property
Our subscriber plans to let the properties he’s created and naturally feels he ought to be entitled to some tax relief for the extra cost that the levy represents to his letting business. Trap. The CIL is not a cost of the letting business and is therefore not tax deductible from rental income.
Capital expenditure
The CIL, like architects’ fees etc., is part of the cost of constructing a building and is therefore a capital expense. The general tax rules for calculating taxable profits and losses for any business specifically block tax deductions for capital costs.
Capital gains tax
If or when our subscriber sells the property the capital gains tax (CGT) rules say he can deduct expenses “wholly and exclusively incurred by him in providing the asset” when calculating any gain or loss he makes (see The next step ). It is not clear whether the CIL is deductible for CGT purposes but we think there’s a reasonable argument that it is.
Use of property in a trade
If the CIL is charged for a property which you will use in a trading rather than rental business, it isn’t expenditure which qualifies for capital allowances under the relatively new rules for structures and buildings (for further information about the SBA, see The next step ).
Property development
The tax position is again different where, unlike our subscriber, a property is developed solely for the purpose of selling it for a profit. If you frequently do up or convert properties with the intention of selling them, you’re carrying on a trade and the properties are trading stock. Profits you make are liable to income tax (or corporation tax if you run your business through a company). The rules for calculating profits or losses allow tax deductions for all expenditure unless specifically excluded. There’s nothing in the rules to suggest that the CIL is an excluded expense.
The CIL is not a tax-deductible expense for the property rental business. Instead, it should count as part of the cost of the property when working out any capital gain or loss when sold. If our subscriber was a property developer, the CIL would have been a tax-deductible cost when working out his profits.