For many reasons, you will occasionally spend on repairs and improvements when renting properties. Whether it is because your tenants are complaining about a broken boiler, your walls have been damaged and need repainting, or you fancy a new roof to improve the longevity of your property.
Repair and home improvement costs may sound similar however they are, in fact, very different, with contrasting implications on your tax liability to HMRC.
What are repairs and maintenance?
From a tax perspective, repairs are revenue expenditure. Revenue expenditure relates to short-term expenses required to keep your property business running.
Maintenance refers to keeping the property in its original condition. For example, getting your washing machine serviced to ensure it is working properly will keep the asset in its original condition for longer.
Repair costs are money spent to return the asset to its previous condition. For example, costs associated with fixing a broken fridge.
Examples of revenue expenditure
- treating damp or mould
- fixing an appliance
- fixing light fixtures
- repairing walls, floors, roof
- replacing an existing radiator, boiler, bathroom suites, and kitchens, but not electrical or gas appliances
Revenues expenditure - Impact on Tax
Repairs can be deducted from profits in the year they are incurred. It doesn’t matter whether you pay the bill before or after the end of the tax year. Any revenue expenses must be wholly and exclusively for the property rental business.
Suppose you purchase paint to repaint a rental property but end up using half of the paint to repaint your primary residence, which you do not rent. In that case, the whole cost of the paint can't be offset against your profits as it was not wholly and exclusively for the rental business.
If the sum cost of the paint was £30 yet only half was used for the rented property, you would only be able to claim £15 against your profits.
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What are home improvements?
For tax purposes, any improvements made to the house are classed as capital expenditure. A capital improvement is a long-term renovation, adaption, or enhancement to a property that considerably enhances its worth. If you carry out home improvements such as building an extension, replacing the roof entirely or getting new carpets, this will undoubtedly increase the capital value of your property.
Examples of capital expenditure
- extending a property
- new carpets
- installing air conditioning
- new roof
- replacing gas or electrical appliance
Capital expenditure - Impact on Tax
Unlike revenue expenditure, capital expenditure can't be offset against current-year rental profits. Instead, it will only be offset against the capital gain when the house is sold or disposed of.
It's vital to keep documentation of all capital improvements made to the properties you rent out throughout their lifetimes to be able to reclaim this if and when you sell the house.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.