Expense or Capital Costs

Expense or Capital Costs

8:51 AM, 24th February 2014, About 9 years ago 2

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I am in the process of purchasing a property, it is currently tenanted but the property is being sold with vacant possession.

Given the age of the property (~ 110 years old) I have had a full building survey completed. Based on this I am looking to undertake the following works: Expense or Capital Costs?

Improve damp protection & ventilation
New pitched roof and flat roof for extension
Re plumbing
New Kitchen
New Bathroom

Only the damp and ventilation issues are required immediately, the remainder are jobs that will need doing in the next 3-5 years.

I am slightly confused as to which work can be expensed against income and which needs to be set off against capital costs?

My feeling is all bar a percentage of the kitchen could be offset against income, while the kitchen should be 50/50 as it is being enlarged. I have read the HMRC guidance and really that doesn’t help.

Can people offer any guidance on their experience?


Ian Clifford

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Mark Alexander - Founder of Property118

8:56 AM, 24th February 2014, About 9 years ago

Hi Ian

Please seek professional advice from an accountant who is insured to provide it.

There are bound to be more questions at this stage, for example, are you intending to let this property or sell it post refurbishment.

See >>> http://www.property118.com/landlords-tax-returns-10-common-mistakes/61630/

Neil Patterson

12:34 PM, 24th February 2014, About 9 years ago

Hi Ian,

I made contact with Graham at our own and many P118 readers' accountants Pacifc and Graham kindly gave me the following advice:

It is not uncommon for a landlord to acquire a buy to let property which requires some work to be undertaken before the property is first let. It would be impossible to provide a definitive guide as to which expenditure would be treated as "revenue", and deductible from rental income, or "capital", and deductible from disposal proceeds in calculating any capital gain or loss arising on disposal of the property.

It would be necessary to consider each item of expenditure carefully with regard to the following:
1. The timing of the expenditure, especially where the repairs are undertaken not long after the property is bought.
2. The overall condition of the building when it is bought.
3. Whether the building was bought at a reduced price to reflect the fact that works were needed to improve its condition.
4. The extent of the works undertaken.
5. Whether or not there is any improvement, for example, is the expenditure to replace an item that was there previously? If yes, is the replacement 'like for like' or for the modern equivalent or does the replacement differ considerably from what was there previously.

Clearly, whether or not the item of expenditure is a revenue or capital item will depend upon the specific circumstances. If an item of repair expenditure is not correctly claimed, it cannot be claimed at a later point in time against the proceeds of sale; you cannot choose how you claim for the expense. As Chartered Accountants, we would always recommend that you seek professional advice before incurring any substantial expenditure so that you are aware of the tax treatment in advance. If you have not appointed an accountant to look after your tax affairs, and to prepare your rental accounts and Tax Returns for you, you may wish to consider doing so. Not only will you have the peace of mind that your Tax Returns have been prepared professionally and accurately, you will have an advisor available to you to guide you on matters such as this at the time that you are considering incurring the expense. We provide accountancy and taxation advice to landlords and would be happy to provide you with an initial FREE telephone consultation if you are looking to engage the services of a specialist accountant. If this may be of interest to you, please submit your details using the Accountants Introduction Request at the bottom of the page below."

See>> http://www.property118.com/landlord-tax/

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