This is a great question that was asked this week. Before it can be answered we need to separate investors from traders.
This is a huge topic but loosely, for property, Investors generate their income from rent. Traders generate their income from flipping and developing for sale.
Let’s deal with investors in the first instance then. I have covered capital vs revenue spend just recently and you need that knowledge in the bank before this topic. Spending money on the purchase of a property is a capital cost. That means the spend is collated as part of the calculation when the property is sold. So survey fees, SDLT, solicitors fees, sourcing costs and auction fees are all part of the cost of purchase. Assuming you buy the property they are all allowed as a cost against that sale which makes perfect sense. The crux of the question though is what happens if you don’t get the property?
Simply the answer is nothing. Nothing happens with that spend. It is a cost allowed purely against future sale of the specific property. So if you don’t get the property there isn’t a sale to set it against. No property – no tax relief. Think of it as loss by misadventure.
What about traders though? Well their spend is still split in to capital vs revenue costs but because their output is taxed as income there is a slightly different question at play. So long as the cost is wholly and exclusively incurred for the purpose of the trade it will be an allowable cost. If you were making tables and you produced a defective one you would still get the cost of the wood and manufacturing allowed. The same logic is applied for traders.