Capital v revenue expenditure on the first Refurb

by Readers Question

11:19 AM, 25th August 2014
About 4 years ago

Capital v revenue expenditure on the first Refurb

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Capital v revenue expenditure on the first Refurb

I’m just about to complete on my first BTL and need to give the house a “face lift” before I rent it out, mainly fresh coat of paint, new carpets, some laminate flooring and repair a bathroom ceiling (light skimming). Capital v revenue expenditure on the first Refurb

Is it all revenue expenditure?

According to HMRC website a repair of an asset can be written against the profits for that year.

What is considered a “repair” when it comes to BTL residential properties?

Thanks

Iwoma



Comments

Paul Shears

12:46 PM, 25th August 2014
About 4 years ago

This is definitely an allowable claim on the first year's revenue even though you have not had you first tenant.
Many accountants will incorrectly advise otherwise but they are wrong.
You are allowed to claim on items like this, which are clearly maintenance and not capital improvements.
The Inland Revenue allow you to claim as if the maintenance was done on the day that the first tenant moves in even though the work was done prior to this. The same would be true if you replaced the bath with another bath.
To avoid future red herrings from other commenters, the issue is that you are maintaining like with like (More or less). Replacing a bath with a Jacuzzi would be a capital investment that you could only recover if you sold the property when it would be set as a cost against any other capital gains.

Rob

12:56 PM, 25th August 2014
About 4 years ago

Isn't recovering these costs included in the 10% per year wear and tear allowance that we can claim? Therefore if you claim for the costs involved in doing this face lift you can not then claim the 10% wear and tear at the end of your first year as well? I wouldn't of thought you can buy a property that needs a tidy up and then claim the tidy up from the tax man on day 1. If I was the tax Man I would say tough, you knew it was like that when you bought it so it should have been factored into the asking price not claimed from the tax man. I don't actually know the tax rules on this but am merely saying it as I see it.

Romain Garcin

13:11 PM, 25th August 2014
About 4 years ago

When you do work immediately upon acquiring the property and before letting it for the first time, HMRC will look as whether the property was acquired unfit for use in the business and whether the repairs were therefore to make it fit.
If that the case they will likely conclude that the cost is a capital expense, otherwise it is indeed an allowable revenue expense.

See "Repairs etc after a property is acquired" in PIM2020: http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

It seems to me that what you describe is mostly cosmetic, and thus allowable as a revenue expense.

Iwona Kowalska

14:40 PM, 25th August 2014
About 4 years ago

Hi, thank you for your views. This is my understanding as well, although there is a lot of confusion around any work done to the property (before the first let).
Some people tend to think , that even painting it's making the property "fit for purpose" therefore considered a capital expenditure.
It would bee nice to hear form someone who invests in BTL not flips and has reclaimed costs like painting, changing carpets (all like for like), against revenue.
All repairs need to be done before the house is tenanted and preferably before completion..

Paul Shears

15:16 PM, 25th August 2014
About 4 years ago

I (perhaps) stand corrected on a detail. My property was previously a buy to let and as such, could hardly be described as fundamentally unfit for purpose. It did however require maintenance as the previous landlord had neglected it badly.

Iwona Kowalska

15:56 PM, 25th August 2014
About 4 years ago

Thank you Paul. It seems that even some accountants are confused, when it comes to refurb costs (like for like only) before the first let.
As it is going to be an unfurnished let I don't believe a "tear & wear " allowance applies

Paul Shears

18:17 PM, 25th August 2014
About 4 years ago

Section 57 Income Tax (Trading & Other Income) Act 2005 Pre trading expenses. Any money spent for the letting business goes in to the accounts on the first day of letting the first property as if it was spent on that day, providing:
The expense was incurred no more than seven years before the first letting date.
The expense has not already been claimed against tax.
The landlord would have been able to claim the expense if the letting business was trading when the expense was incurred.
Subsequent expenses are entered in to the accounts on the dates they were incurred.
This section specifically relates to day-to-day spending (revenue costs) and not one off improvements (capital costs) - for instance repairing the roof is OK to claim, but adding a new loft room is not.

Yvette Newbury

19:06 PM, 25th August 2014
About 4 years ago

Great response to this and yes we have claimed expenses on a newly purchased rental property, within the guidelines above and before the first let, with no problem. As long as it replacing like for like it is acceptable against income tax and it not viewed as capital expenditures. I also agree though that you will find other websites/accountants who disagree with this, but HMRC have actually updated their advice on this in recent years and confirm that this is acceptable even before first let, subject to the conditions that others have posted.

Michael Barnes

23:11 PM, 30th August 2014
About 4 years ago

The answer has two parts.

1. As stated above, if the expense would be allowable as revenue if incurred later, then it is allowable now.
However, that is true only if the property was in a fit state to live in at the time of purchase. Otherwise it is assumed by HMRC that the purchase price was reduced to reflect the state of the property, and therefore the expense is capital.
If there is any element of improvement in the work done, then that portion of the cost is capital even if the repair is revenue (like for like is revenue; additional features are capital).

Simple redecorating would be considered revenue, but if the redecorating were necessary because of capital work done (e.g. removing a wall), then the redecorating would be capital.

2. Not all of the identified expense is allowable.
Since April 6 2013 there is no 'renewals' allowance for replacement of carpets, curtains, free-standing white goods, other floor coverings, or other items that are not part of the building UNLESS it is a furnished let.
The approximate rule is 'if you lived there and you could take it with you when you move then you cannot claim an allowance for it'. These items are considered assets in their own right and so only repairs of those assets are allowable, not replacement (and only repairs up to 50% of replacement value are allowable).
Thus for carpets etc you can claim neither a revenue allowance nor a capital allowance.

Jane Reckless

23:34 PM, 30th August 2014
About 4 years ago

Reply to the comment left by "Michael Barnes" at "30/08/2014 - 23:11":

These are interesting points, Michael. But regarding the second one, including floor coverings as movable assets seems rather harsh. How many people take their carpets with them when they move?...

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