When it comes to property investors and tax returns, there is that age-old conundrum to face. And that is, what can you claim for, and what can’t you claim for these days? After all, tax relief and the property business has been a lot like shifting sand in the past few years.
A rather complicated area of this is capital renewals. Understandably, it’s not always well understood by your average landlord, who is doing his or her own tax return. So, we’ve tried to explain it as clearly and succinctly as possible, right here:
What is a capital renewal expense?
A capital renewal is when you improve and repair an asset in your property that boosts its value (i.e. it’s less so repairing it; more a case of enhancing it. Replacing an old kitchen with a fabulous, brand new and up-to-date model would be a capital renewal, for instance. Replacing the cupboards of the old kitchen in keeping with the original design and state, wouldn’t. That would, in fact, be classed as a revenue expense, simply because – unlike the new kitchen – it’s not adding to the value of your property. And this is certainly where landlords should look to recoup the cost of buying the property in the first place – by fitting a ‘standard’ kitchen, rather than a dazzling, trendy new version.
Painting and decorating the property every few years or so is a revenue repair, and therefore can be deducted from that year’s tax bill.
Exceptions to the ‘capital improvements’ rule
To complicate matters further, there are exceptions to the repair and improve rule. And that’s all to do with changing standards and expectations. Replacing single glazed windows with double or triple glazing, for instance, would be considered a revenue expense (in which case a landlord can claim for it as repairs in their next tax bill). This is unusual, but is because building standards have improved over the years to the extent that double glazing is becoming considered the ‘norm’ for a house or apartment these days.
Changing the ‘nature’ of an asset
Replacing an old wooden hut with a modern garden room (where the same bikes etc. are stored), but in which a self-employed individual has a desk and works from home, would be a capital expense, because it’s no longer just a hut, but also an office. But bizarrely, so too would changing a wooden fence to iron railings be considered a ‘capital expense’, despite serving the same purpose (it’s because the ‘nature’ of the asset has altered substantially).
Warning for landlords planning on refurbishments
Why doesn’t the same ‘windows’ rule apply to dilapidated properties which are subject to an extensive refurbishment programme then? It’s because the property would have been purchased at a reduced cost. As a result, the repairs – to bring it back to a decent habitable state – will increase the value of the property (i.e. increase its capital value).
New capital expenditure ruling
Since April 6th 2016, capital expenditure on furniture, appliances and white goods etc. has come under ‘domestic items relief’. This means a landlord can reduce his or her tax bill by claiming against the replacement of such items.
As you can see, capital and revenue expenditure - and what’s allowed against tax – can prove complicated in the property lettings world. So it’s definitely worth studying in greater depth or getting advice from an accountant specialising in property matters.
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