The most common question we deal with when preparing accounts for landlords is “is it a repair or improvement”?
It can often be difficult to distinguish between repairs and improvements. However, it’s extremely important to report them correctly for tax purposes. Repairs are often referred to as revenue expenditure and improvements as capital expenditure.
Property investors generally want to report costs as repairs because this means tax relief immediately. H.M Revenue & Customs (HMRC) on the other hand, generally prefer investors to report costs as improvements, as tax relief would only apply when the asset is sold.
If you are a business, you will be able to claim capital allowances on most capital expenditure. The Annual Investment Allowance (AIA) should mean you get 100% allowance in the year of purchase.
So let’s take a look at the differences between these cost types with specific examples for property investors.
A repair or revenue expenditure refers to money spent on maintaining and keeping an asset in a good working condition.
This includes repairs to a newly acquired property that requires work to be done, if the property was lettable at the time of purchase.
This also includes replacing outdated items with the nearest modern equivalent. For instance, replacing single glazed windows with double glazed windows or replacing lead pipes with copper or plastic.
For kitchen repairs, the costs involved in refurbishment would also be considered revenue expenditure. This may include stripping out the old items, replacing worktops and wall units, retiling, plastering, and wiring.
Only similar replacements to the original kitchen can be claimed as repairs. Any new additions (e.g., storage or additional appliances) would be considered an improvement.
An improvement or capital expenditure refers to money spent on an alteration that increases the value of the property, changes its main function, or extends the life of the building.
This would include a newly purchased property which was not in a lettable state at the time of purchase.
The extra renovations made post purchase to ensure the property in a condition to let, will be classified as improvements.
You should always speak with an accountant to determine the status of the expenditure to ensure best tax treatment if you are spending vast sums of money in renovations.
It is also well worth remembering that any money spent on upgrading any materials or appliances to a superior quality item would also be considered an improvement.
There are special rules surrounding ‘integral features’ such as electrical, cold water, water heating and air cooling or purification systems.
If you replace more than 50% of an integral feature within 12 months, this is considered an improvement (capital expenditure) for capital allowances purposes. If you replace less than 50% within the year, this will be treated as a repair (revenue expenditure).
Timing is therefore crucial when considering when you upgrade your property.
For example, let’s say you have a 6 room property, you decide to replace the electrical system in 2 rooms and you decide to do this within 12 months of buying the property.
Because you are replacing less than 50% of the property’s electrical system, this will be treated as revenue expenditure. Hence receiving all the tax relief in the period of expenditure. A good result.
Had you decided to have work done in 4 of the rooms then not so good. Because you will be replacing more than 50% of the property’s electrical system. This will be treated as capital expenditure and there will be staged tax relief.
Before considering any significant expenditure on your investment property consider the following:
Timing of the property
Will it be repair or improvement?
In most cases if the work you are having done significantly increase the market value of the property, it is likely to be an improvement.
In tax however there are always exceptions to the rule; for instance, replacing the roof would be a repair, however, upgrading the kitchen with superior materials and appliances would be an improvement.
Talk to us if in doubt. You can call or email normal manager but if you are not working with us yet you can email Priya at firstname.lastname@example.org