Date posted: 12th Aug 2024
As a landlord, periodically you will need to undertake work on your property.
This may simply involve fixing a leaky tap or redecorating, or the work may be more substantial, such as replacing a roof or a kitchen.
From a tax perspective, all work on a property is not equal and it is important to determine whether the work undertaken constitutes a repair or an improvement to the property. This will affect if, how and when, tax relief is given for the expenditure.
Repairs
Expenditure on a repair is revenue in nature and deductible when calculating the profits of the property rental business.
A repair is the restoration of an asset by replacing part of that asset. A repair will normally put the property back in its original condition. An example of a repair would be replacing a few roof tiles blown off by a storm or repairing a leak in a shower. HMRC cite the following as examples of common repairs that would be deductible in computing the profits of a property rental business:
- exterior and interior painting and decorating;
- stone cleaning;
- damp and rot treatment;
- mending broken windows, doors, furniture and items such as cookers and lifts;
- re-pointing; and
- replacing roof tiles, flashing and guttering.
Anything that results in a significant improvement of the asset beyond its original condition will not be a repair.
Capital expenditure
Capital expenditure is usually given as a deduction in computing the gain or loss on the disposal of the property.
The cost of land and any buildings on that land is capital expenditure, as is any expenditure which adds to or improves the land or property (such as adding an extension) and the cost of refurbishing or repairing a property bought in a derelict or run-down state.
Identifying the difference
It will not always be clear whether expenditure constitutes a repair or an improvement – it is a question of fact or degree in each case whether the expenditure results in an improvement. Where the level of improvement is so small that it is incidental to the repair, HMRC will allow the full amount of the expenditure to be deducted in calculating taxable rental profits.
In some cases, particularly when restoring an old asset, a degree of improvement will arise simply because of the use of modern materials. Where the materials used are broadly equivalent to the old materials, HMRC should accept that the expenditure is revenue in nature. An example here would be the replacement of wooden beams with steel girders, or lead pipes with copper or plastic pipes. Likewise, expenditure on alterations where improvement arises as a result of an advancement in technology but the function and character of the asset is the same should be allowed as revenue expenditure. The example cited here by HMRC is the replacement of single glazed windows with double glazing.
By contrast, rebuilding and extensive alterations will count as capital expenditure.
Where improvements and repairs are undertaken at the same time, the expenditure should be split on a reasonable basis, with the part relating to repairs remaining deductible.
If you have any queries regarding any aspect of property taxation, contact our expert team.
