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  • Tax

    Capital vs. Revenue

    Hi,

    Back in October 2015 me and my partner bought a former 3 bed semi which was informally arranged as two one bed flats.

    We formalised this arrangement by gaining appropriate planning consent and set about full refurbishment of the two units.

    Anyway on to my question, does the cost of new electrics, plumbing, kitchens, bathrooms, windows, doors, flooring, decoration etc. constitute capital or revenue expenditure for tax purposes?

    We also spent a good chunk of money on insulation, sound proofing, fire proofing and structural work for Building Regs approval, which I'm presuming is capital expenditure?

    Any advice would be appreciated.

    Jonathon

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    If I was you I would claim the repair as if you were updateing one Flat ie it Had an electric supply to one house so claim that

    If you use a sensible percentage say 60% of all costs as an expense against profits

    I would set aside the other 40% as a capital expenditure

    Once you do your Tax Return that may be the end of the matter But HMRC may question why your expenses are so high in the year

    If they do question what your doing keep all the everdance Invoices recites ect to show them what you have done

    They will decide what is a fair claim

    a strong paper trail is vital keep records and photos before and after

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    Learn Change and Adapt ?????


    The fundamental question concerns if the work has been carried out before renting below is HMRC Guidance on the issue:-

    Carrying out work on a property before leasing or renting

    Sometimes costs of work on a property before you lease or rent it will be capital expenses, and so are not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.

    Any works undertaken to put it back into a fit state for letting are unlikely to be repair works - they will be capital works as they improve the property. The costs for these works won’t be an allowable expense.

    https://www.gov.uk/guidance/income-tax-wh...or-renting

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    Dear Jonathon,

    If what you have done is to convert one property into two separate properties, then the expenditure is capital, unless any of the work done was a repair or a qualifying replacement which was carried out to address wear and tear, and return the property to its original condition, eg if the plumbing work was done to replace old and worn fittings, this would qualify as a repair, but if it was done to accommodate the two separate dwellings, it would be capital.

    Consequently, you need to consider the work that was done and the reason for it. If it is not evident from the invoices which costs related to the different types of work done, H M Revenue & Customs would accept a reasonable apportionment of the costs, based on your best judgment or the opinion of the persons who undertook the work.

    Hope that helps, and if you require any bespoke property tax advice, please do not hesitate to send us a message.  

    Best wishes, 

    RITA4Rent

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk


    All,

    In our case, a lot of the groundwork had being done already in that the building had already being separated into individual units, albeit illegally without appropriate planning consent. Therefore when we acquired the property it already had two of everything, so we effectively replaced everything like for like. The units were also let a few months prior to us acquiring the property, and although they were tired looking by no means were they uninhabitable. 

    Thanks for the advice.

    Jonathon

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    Free Spreadsheet Download - Allowable costs post  budget announcement

    Video demo: 

    Download spreadsheet: https://www.optimiseaccountants.co.uk/all...dOUTUyZNAY

    What costs can you offset against your property income. The above article discusses the three R:

     - Repairs
     - Replacement
     - Renewals

    We wished we could take the credit for the genius marketing but sadly we are unable to. The three R's in principle are costs that may be offset against property income and reduce the tax of the property investor.

    It is therefore important for you to mange your suppliers to ensure that invoices says "installation of a replacement kitchen" which is allowable costs against the property income rather than "installation of a new kitchen" which is not allowable and will be deemed by HMRC as a capital costs

    The article below discusses the use of capital allowances on certain property investments such as holiday lets and HMOs. The interesting thing about capital allowances is the fact that it is possible for you claim back any tax paid on your employment if losses are made.

    Article: https://www.optimiseaccountants.co.uk/cha...dOVdEyZNAY

    The final article in this suite is all about holiday lets. Provided that the investment meets the HMRC criteria for it to be defined as a holiday let then capital allowances may be claimed. This article looks as the type of costs that fit into the capital allowances bracket.

    Of course there are additional tax benefits to holiday lets including: Holdover relief on sale of the property, hold over relief in the event of your death to mitigate IHT, the profits from holiday lets are taken into account when looking at your pension contributions allowances plus many many more

    Article: https://www.optimiseaccountants.co.uk/are...dOVfUyZNAY

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    Simon Misiewicz | Business Development Manager

    Optimise Accountants

    Telephone: 0115 939 4606

    website: http://www.optimiseaccountants.co.uk