Capital expenditure
Expenses are generally ‘capital expenses’ if they will be used in the business over a longer period of time, such as when you:
· add something to the property that wasn’t there before
· alter, improve or upgrade something that was existing
· include the purchase of furnishings and equipment for the property
Capital expenses aren’t allowable and can’t be claimed against your rental income, but you should keep records of them as you might be able to set them against Capital Gains Tax if you sell the property in the future.
These are examples of capital expenses that wouldn’t normally be allowable:
· adding an extension
· installing a security system if there wasn’t one before
· replacing a kitchen with one of a higher specification
Costs of maintenance and repairs
Revenue expenses are allowable, which include the day-to-day running costs of the property.
Allowable revenue expenses include the costs of maintenance and repairs to the property (but not ‘capital’ improvements).
A repair restores an asset to its original condition, sometimes by replacing parts of it. Property repairs can include replacing roof tiles blown off by a storm, replacing a broken-down boiler or redecoration between tenants to restore the property to its original condition.
Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.
If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.
This also applies if you keep your tenant’s deposit from a Tenancy Deposit Scheme to cover damages they have caused to the property. You can only claim expenses incurred for repairs in excess of the amount of the deposit that you retained.
You can’t claim the costs for replacing furnishings or equipment in a property. These aren’t allowable as costs of maintenance and repairs, but from 6 April 2016 they may qualify for Replacement of Domestic Items relief – see article Wear and Tear allowance/Replacement of Domestic Item Relief
The costs of renewing fixtures such as baths, washbasins or toilets are normally allowable. These are considered to be repairs to the building as long as they are a like-for-like replacement and not an improvement.
The cost of replacing some small items, such as cutlery, crockery, cushions, bed linen and similar is also allowable if you are not claiming the wear and tear allowance. The items have to be of low value, have a short useful life, and need to be replaced regularly (almost annually) to qualify.
Carrying out work on a property before leasing or renting
Sometimes costs of work on a property before you lease or rent it will be capital expenses, and so are not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.
Any works undertaken to put it back into a fit state for letting are unlikely to be repair works – they will be capital works as they improve the property. The costs for these works won’t be an allowable expense.