This video is to look at rental properties and whether something is classed as repairs or a capital spend.
Upgrading a rental property
When you first take on a property with a plan to let it out, you are bound to want to do some work on it. You may need to make it just that little bit more special and possibly, a little bit more rentable.
You expect to be able to offset these costs against your rental income in the year. But, well, sometimes that is just not the case. So initial refurb costs are not allowable at all. So these are costs that you spend prior to making the property rentable, or you actually have the rental purposes out there.
But hang on to the receipts, because what will happen is when you come to sell the rental property, potentially, you’ll have capital gains tax. And the element of purchase costs, et cetera, would be not only the cost of the property, but also any of the work you did on it to make it up to a standard to get it to be able to be rented.
Renting out previous home
It’s the same with if you currently are living in a property and you move, but you decide to keep your original property. If you repair everything, upgrade it all, all that would be contributing to the capital cost of the property and not allowable expenses. But if you maintain it after the first rental, or even during the first rental, anything you spend on it for repairs and maintenance would then be allowable for expenses against your income.
So for example, if for some reason you had a leak out of the bathroom and you had to go and repair the ceiling, if it’s already in its first rental or already had been rented, the repairs of that ceiling would be allowable against revenue income. And you don’t have to worry about adding it to the cost of the purchase price of the property.
So other things that you need to look at are replacement items. So for example, I don’t know, let’s say a fridge freezer. If you had to replace the fridge freezer and you decided to update it to an American style fridge freezer, then that would not be an allowable cost for revenue expenses. And it wouldn’t be able to claim replacement value against an allowable expense.
As it’s an upgrade of a product or an item, it would go into the capital cost. So still, keep the receipt. It will come in useful when you sell the property. Any enhancements to the property, again, would not be an allowable cost against your revenue from the property. So keep the receipt.
So there might be an example of say, the roof was leaking and there was a recourse to replace the tiles, then that would be an allowable revenue expense and you’ll be able to deduct it from rental income. However, if you decided, “Oh, whilst I’m repairing this roof, these tiles are missing, I’ll add in a window,” so you potentially could convert the loft, then that would be an improvement and not an allowable cost for revenue.
So we have an example here. These are your typical capital costs that you won’t be able to offset against your income from property rental, but you need to keep hold of the information in order for it to go against your capital gains tax. Capital gains tax is not included in this video, but it will be a video elsewhere in the resource centre.
So your typical capital costs. If you decide to purchase a bit more land to the property, then that would incorporate into increasing the value of the property, and part of capital gains. If you add an extension, a conservatory, you convert an out building, again, a capital cost. Not to be taken against revenue.
You upgrade the kitchen and the bathroom. Well, if you replaced a unit, then that would be a repair maintenance. But if you stripped everything out and you upgrade it to a much more fuel-efficient kitchen and upgraded worktops and things like that, that would be a capital cost. However, if you just replace like for like, then that potentially is a repair and maintenance.
So quite happily, somebody could go in, rent the property, completely trash the kitchen and you have to replace it. So a like for like replacement would be an allowable expense. I’ve put new access roads in, but that really only applies if it’s a private house, or a private road rather than an adopted highway.
If you decide to go for triple glazing instead of replacing a single glazing window, unless required by law, then they’ll be deemed an upgrade. That will be a capital cost and not a repair. Upgraded boilers. Times change. I personally have a back boiler in my house. Woo-hoo. It’s an oldish house. Back boilers were all the rage then.
And if I wanted to update the boiler, I’d have to have a completely different style, go in a completely different area of the house, et cetera, et cetera. As my type of boiler is not available anymore, I would be able to replace it and give it a rental expense as a repair, and not a capital cost. However, if it was a normal boiler and it was an upgrade for a more fuel-efficient, and lower efficiency ones were available, then that would be a capital cost.
If you’ve put something in there that wasn’t in before, so for example, you’ve got a dining room or a kitchen cum diner and you decide to put in a sofa bed instead of the sofa that was there, that would be an upgrade. So a capital cost. Or if nothing was there before, then the additional for the furniture would be a capital upgrade. That would be along with the capital costs. It’s been a bit heavy going, I know. Sorry.
So your typical revenue maintenance costs after the first letting has started, there are more examples on another video, but painting and decorating, repairs to broken windows, doors, kitchen, bathroom, repairing roof leaks and any repointing that might have to happen to walls, fixing white goods and repairs to carpet and flooring, are your typical examples of what you would call a revenue type of expense, or revenue maintenance costs.
But I hear you say, what happens to the stuff that’s in the property that gets fully furnished, or even partially furnished? Well, there is a replacement allowance. It used to be a 10% wear and tear allowance, but that disappeared. So after April 2016, you now get a replacement allowance. And this is replacement of white goods. So your cooker, your washing machine, your dishwasher, all that type of stuff.
If you have to replace it, then it’s a replacement allowance. It doesn’t go in the main body of the income and expenditure on the rental property. That goes in a slightly different section. We’ve said repairs of carpets and flooring would be allowed, but replacement of carpets, so long as it’s not, “Oh, I’m going all of a sudden to solid oak flooring,” that would be an upgrade and a capital cost.
But a replacement of like for like carpets and flooring would be a replacement allowance. And also, as I’ve said before, replacement to furniture. That would be an allowable expense, providing it is not an upgrade. So there you go. That is what is allowable in terms of repairs and capital spend, and the difference between the two. So if you have any questions, please feel free to get in touch and we’ll try to answer them. Thanks very much.