In a nutshell, capital renewal in property investment (i.e. buy to let or sell terms) is when you replace a feature of a building i.e. a permanent ‘fixture’ such as a roof, internal wiring, heating or an entire plumbing system. The reason for this is usually because it’s no longer functional.
Repairing or replacing such a fixture can be an allowance revenue expense, provided it fits with the following conditions:
(a) the work involved restores the capital asset to its original condition;
(b) that it’s not a vast improvement, but rather a replacement.
A ‘vast improvement’ would be fitting underfloor heating or a fancy new kitchen. Both are capital expenses, but because they improve and upgrade the property (meaning a higher rental cost can be charged), they can offset against capital gains tax when the property is eventually sold.
Further examples of capital renewal expenses
As a landlord, you could also claim for external repairs, like when you need to replace guttering and loose roof tiles, or if you have to treat damp with a damp-proofing course, or you have to pay to get a professional in to deal with work on dry rot (provided these repairs are not already covered by insurance).
Internally, renewing a bath or a sink with a crack in it, a shower that’s leaking or a toilet lid that keeps sliding off, are all capital renewals. So too is a decorator’s bill for painting and decorating both the inside or outside of the property. The cost of glazier replacing a broken window would be something you could claim as a capital renewal. Even getting the carpets cleaned in the flat would come under this expense category.
When the line between capital and revenue gets blurred
Even though the above all sounds straightforward, complications about the definition of whether a renewal is a capital or revenue expense can arise. This could be, for instance, when a bathroom is being replaced. Under the like-for-like rule i.e. the replacement must be a similar standard to the older version, simply replacing the sink, toilet and bath with updated versions of a similar cost would be an allowable revenue expense, which you could claim from your tax bill.
Buying a spa bath as a replacement and even changing around the layout of the items in the bathroom would be a capital expense, because it has been deemed to have ‘improved’ the bathroom (or, in HM Customers and Revenue terms, ‘changed the character of the asset’). Like the upgraded kitchen mentioned previously, the cost could be claimed when calculating Capital Gains Tax.
Some assets are considered ‘integrated features’ i.e. an under-cabinet lighting system in a kitchen, or a lift (in a commercial setting). If the cost of replacing these is more than 50 per cent of what it would cost to replace the entire feature, then this is a capital expense and not a revenue renewal.
Special conditions for extending a property lease
If your buy to let (or property renovation that you plan to sell) is a leasehold property and you decide to extend that lease by another 30 years, for example, then this would be claimable against tax as a revenue expense. However, if you’re extending it by more than 50 years, then this is a capital expense.
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