I want to optimise my revenue allowances from new investment !

by Christopher Marsden

8:15 AM, 18th August 2017
About A year ago

I want to optimise my revenue allowances from new investment !

Make Text Bigger
I want to optimise my revenue allowances from new investment !

I have recently purchased and refurbished a house and now it’s time to submit all the info to my accountant. I once read, I think on this forum, that if you asked 10 accountants which costs were allowable against income tax and which against capital gains you would get 10 different answers.

I also read that everything you spend before your first rent is received is a cost allowable against capital gain.

On the refurb we had to carry out structural repairs . Are these allowed as a repair cost when calculating income ?

The kitchen and bathrooms were unfit for letting so we provided new . I take it the cost of these would be allowed against capital gain.

Any guides or lists would be gratefully received .

I want to be an informed landlord that can constructively challenge my accountant ( who are not property specialists )

Thanks

Chris



Comments

Mark Alexander

8:33 AM, 18th August 2017
About A year ago

Repairs and renewals are generally considered to be expenses which can be offset against income. Structural repairs would fall into this category. A replacement kitchen could too, however, only on a like for like basis. If the old kitchen had just a sink and two cupboard but was replaced with a modern fully integrated kitchen costing £25,000 that would be different. Same goes for bathrooms. if you remove a rusty old tin bath and replace it with a musical LED lit jaccuzi spa that's more likely to be to be considered a capital expense, or at least in part.

If you were to add an extension, that would definitely be a capital cost, as would adding a garage, a conservatory, a swimming pool. The latter of which is unlikely but not unheard of in a rental property.

As for dealing with refurb costs prior to letting, I have always capitalised these. The only cost I treat as expenses prior to letting a property are lenders arrangement fees and my own proportion of the conveyancing costs.

Once your business is more established then you will have R&D costs, e.g. on properties you consider purchasing but don't go anywhere. On the basis that I am running a business I can choose whether to deal with these as capitalised R&D costs or offset them against income across the business as expenses.

I hope that helps.

The question is; will you now get 9 more comments from other people and nine different answers? LOL

T B

9:52 AM, 18th August 2017
About A year ago

Hi Both

Re pre letting expenses:

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2505

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2020

@ Mark, i think your missing out on tax relief here? Unless you are always buying at BMV or always carrying out capital repairs i dont see why you would "As for dealing with refurb costs prior to letting, I have always capitalised these."

Mark Alexander

10:17 AM, 18th August 2017
About A year ago

Reply to the comment left by T B at 18/08/2017 - 09:52
Rest assured, I am very familiar with HMRC's internal manuals and I am confident I am optimising my tax position.

Thank you for posting links to the manuals though, I'm sure Chris will find them very helpful in preparation for his visit to his accountant.

Jireh Homes

12:56 PM, 26th August 2017
About A year ago

Whilst some expenses are clearly capital and thus an offset against CGT when property sold (if I understand this correctly) , many pre-rental expenses may be considered as ether revenue or capital (applying a bit of judgement). Advantage of considering as much as revenue is immediate tax relief. My approach has been to allocate to revenue all refurbishment (including new kitchen units and appliances) and pre-letting expenses and limit allocation to capital expenses significant major works. e.g. changing CH from electric to gas. Structural repairs would I guess depend on why the work undertaken.. And new bathroom & kitchen could be considered as either, depending on your point of view as to if significant upgrade or renewal Another advantage of allocating to revenue is once claimed, can forget about need to keep the sum & receipts till the 7 years(?) after sale.

I have allocated the full cost of conveyancing as a capital expenses, on the basis the proportion is small and insignificant. Also makes book keeping easier!

A discussion on the pros and cons of allocating to revenue / capital would be a good topic (if not already covered on another post).

Allan

Mervin SX

16:28 PM, 27th August 2017
About A year ago

With regards to a mortgage arrangement fee - I have also always included this as a revenue cost.

But for the first time, I am about to add such a fee to the mortgage outstanding - can this also then be included as a revenue cost?

Mark Alexander

20:59 PM, 27th August 2017
About A year ago

Reply to the comment left by Mervin SX at 27/08/2017 - 16:28
Hi Mervin

Yes it can.

Christopher Marsden

23:07 PM, 28th August 2017
About A year ago

Thanks all for your helpful responses . I read the HMRC manuals that TB provided the link to and without doubt there is an element of judgement as to how costs are dealt with. I don't believe we substantially changed the house in that we did not extend it and both in the bathroom and kitchen we replaced end of life components with new . We spent circa £25k on the property as it was in a pretty bad state .Reading the manuals I got the impression that once my wife and I commenced investment in rental property ( this commenced with a flat in 2013 ) all costs subsequently associated with raising capital for increasing our portfolio ( albeit only 2 properties ) should be treated as a revenue cost.
When we bought the property we had a structural survey done which recommended repairs to some lintels over Windows and brick arches that were spreading so this work was completed ( and once identified would have been required by our lender anyway ).
Our objective is to legally account for as much of these costs as possible as revenue costs.
Any last advice .And thanks all for your comments and help.
I have been a member since we started in 2013 and also a NLA member but 118 has been our mentor through the last 3 years.


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Patrick Collinson has got it wrong yet again!

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More