Refurbishment – claimable allowance or capital outlay?

by Readers Question

12:07 PM, 28th April 2014
About 6 years ago

Refurbishment – claimable allowance or capital outlay?

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Refurbishment – claimable allowance or capital outlay?

Hi,

I wonder whether anyone can help me on this please?

I recently bought 2 houses both of which were in run down old fashioned condition as follows:

Property 1 had been owned by 2 elderly brothers. Overall dirty, old fashioned decor. Filthy ‘doggy smelling’ carpets. Dated kitchen and bathroom and in my opinion would not have rented out to anyone without a revamp which I have done and now looks great – cost around the £5000 mark.

Property 2 had been rented out for the last 25 years with little done to it in that time beyond decorating. Decor fine (if you like artex!?). Old fashioned kitchen and bathroom and archaic gas fires x2 one of which had a back boiler for hot water and central heating.
Here I replaced one gas fire with a good looking modern electric fire and the other was removed and a new gas combi boiler installed along with modernisation of heating system with system flush, Magnaclean, trvs in each room etc etc. Plus updated fuse box and electrics (not full rewire). Old lino replaced with ceramic floor tiles. Modern kitchen units and bathroom suite installed in place of the old ones.

My question is this:

My accountant told me that because the revamps were done before any tenants moved in, the outlays are capital costs and not allowable costs against income, but I would argue that without the refurbishments first the properties would not have been in a rentable condition – all outlay went on bringing the properties up to modern standards, like for like and nothing put in that wasn’t there before, ie no extensions, loft conversions or anything like that.

I’m sure that this has been encountered by lots of landlords before and I would be grateful if someone could help please?

Thanks!

Annerefurbishment



Comments

Roy B

12:23 PM, 28th April 2014
About 6 years ago

Sorry Ann - I got caught the same way because I would not let a house in a condition I would not live in I refurbished before letting and will get the allowances against CGT.

Romain Garcin

12:48 PM, 28th April 2014
About 6 years ago

I'm no account but I think that whether the expense was incurred before or after the first tenant moved in is irrelevant.
What matters is the nature the expense: Repairs are normally revenue expenses and improvements are normally capital expenses.

See: http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

As such, I would think that for a refurbishment, some expenses will be revenue (e.g. just re-painting a room or replacing old carpet) and others will be capital (e.g. installing double gazing windows if existing ones were single glazed, new boiler?)

Mick Roberts

12:51 PM, 28th April 2014
About 6 years ago

Yes. I've had actual tax investigations on this subject. And in the investigation room, the HMRC inspector (as a general rule), said ANYTHING spent before your first rent comes in, I had to not include in the current tax year expenditure, but had to be saved for a capital allowance when we sell the house in 10 20 years etc.
Not what u want to hear I know, & I can only talk from my experience, but I have had the tax investigations, so do have knowledge of what certain HMRC staff have a stance on.

Romain Garcin

12:57 PM, 28th April 2014
About 6 years ago

Reply to the comment left by "Mick Roberts" at "28/04/2014 - 12:51":

HMRC's own PIM2505 states that expenses incurred before the start of the business are allowable if:
- is incurred within a period of seven years before the date the rental business is started, and
- is not otherwise allowable as a deduction for tax purposes, and
- would have been allowed as a deduction if it had been incurred after the rental business started.

So it seems possible to claim expenses.
'start of rental business' means the moment your _first_ property is let.

http://www.hmrc.gov.uk/manuals/pimmanual/pim2505.htm

The caveat seems to be the state of the property: If completely derelict (as in unlettable) then expenses are likely to be all considered capital.
Otherwise, as per above could be revenue expenses depending on their nature.
See e.g. http://www.accountingweb.co.uk/anyanswers/what-can-be-claimed-flat-rented

Andy

13:00 PM, 28th April 2014
About 6 years ago

Hi everyone.
I have completed my accounts for the last 5 years and spoke with hmrc after they had queried my first submission as they where also trying to label the works as not allowable, however it could prove that I had replaced like for like and the property was unhabitable, the council labeled as this once we took it over charging no council tax, and all works where required and not for fashionable needs.

The hmrc accepted my submission after reviewing them so if you pull there leg you can get around it. My first year accounts started at -£8000 and each year the accounts is slowly reducing the deficit. Just like any business it would be incorrect to display accounts showing a property has taxable profits if it actually isn't in profit. I hope that makes sense, I would just advise you to submit your own accounts if you have just the two properties.

Anne Nixon

13:26 PM, 28th April 2014
About 6 years ago

Reply to the comment left by "Andy " at "28/04/2014 - 13:00":

Response to all responders

Hi everyone - thank you so much for your input. I wonder if items could be gone through one by one on their merits?
eg. a tenant could not be expected to live with smelly old carpets or dirty wallpaper but dated kitchen units and bathroom suite could have been lived with. Old gas fires, boilers and fuse boxes would present a health hazard (and would definitely not be energy efficient) but old lino might have been livable with?

Thanks again,

Anne

Michael Barnes

15:50 PM, 28th April 2014
About 6 years ago

If the work was necessary to make the property habitable, then it is my understanding that HMRC will take the position that the purchase price would have been reduced to reflect the need to do the work, and that allowable expenses will be Capital Expenses.

If the property was habitable but you chose to make like-for-like replacements, then it is my understanding that HMRC will consider the allowable expenses to be Revenue Expenses.

Note that since tax year 2013/14 there is no renewals allowance for unfurnished property, only for furnished property (repairs are still allowed up to 50% of replacement cost).
The approach taken by HMRC is that free-standing assets (essentially anything that a seller might take with them) are treated as assets in their own right and not as part of the property and therefore replacements are not allowable as revenue Expense AND are not allowable as Capital Expense. This applies to such things as free-standing fridges and cookers, and to carpets and vinyl floor coverings (even though they are stuck down!).

It sounds like in your situation the allowable expenditure is indeed capital.

I would suggest calling the tax office and speaking to a Tax Inspector (not to the person who answers the phone: they can only deal with simple things). You might want to phrase the question along the lines of "I am considering buying these properties and doing this work; what is the tax treatment?" and asking about part capital part revenue once an answer has been given.
Take teh Tax Inspector's name and note the time of the call as well as noting AT THE TIME the advice given. You might also be able to get them to write to you stating what has been told over the phone (always good when anothe inspector looks at what you have done).

I have always found tax inspectors helpful, and one gave me advice that saved me about £2000 a year for 5 years!

Ian Ringrose

15:55 PM, 28th April 2014
About 6 years ago

If you got a BTL mortgage and the expected rent was stated on the valuation report without requiring any work to be done, then the property is clearly habitable.

There is no requirement that a “nice” tenant would wish to live there, just that it is good enough that someone CAN live there.

Joe Bloggs

16:03 PM, 28th April 2014
About 6 years ago

im not an accountant either, but seems first property cannot be claimed (other than CGT), but second property repairs can, i.e.
'Thus, after the first property has been let, any later expenditure leading up to the letting of the second and later properties is part of the rental business and can be deducted - provided it meets the conditions outlined at PIM2000 onwards (it is incurred wholly and exclusively for the purpose of the business, it isn’t capital expenditure etc). '

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