If you rent out a residential property and have expenses during the tax year, you need to determine if these are revenue or capital expenses. Revenue expenses can be claimed in your annual tax return to reduce your profit, whereas capital expenses can only be claimed when property is sold. Also, you need to consider if these expenses are replacement or an improvement to the property.
In this blog, we are going to take various examples and explain to which category they are related.
Replacing furniture
If you replace a one sitter couch that is old, with the same type of chair (valued at £250) this is considered a revenue expense, and you can claim the entire £250. If you replace it with a 3 sitter couch (valued at £750) this is considered an improvement to the property, and you can only claim £250 as a revenue expense. The extra £500 will need to be noted as possible capital expense.
If there were delivery costs of the new furniture or costs to remove the old furniture, this can also be added as a revenue expense. If you sold the old furniture, you must deduct the sale price from your expense, so in above example, if you sold the old couche for £50, you could only claim £200.
If you replace an old fridge with a new fridge, this will be considered a revenue expense even in a scenario that the new fridge is modern fridge and has a better energy efficiency rating.
Repairs to property
A repair is where you restore something to its original state without improving it. This type of repair is considered a revenue expense.
For example, if you need to replace a dripping tap and you replace it with the same type of tape. If, however, you replace the tape with a more advanced type of tape, then this would be a capital expense, as this is an improvement. The same rules would apply, as above regarding claiming the price of the simple tap.
If you need to repaint the property before reletting, this would be considered a repair and a revenue expense.
If a like for like replacement is no longer available due to changes in technology or current items sold in the shops, then even if the repair is an item of better quality, this is still considered a revenue expense.
For example, if you need to replace single glazing windows and you can only repair it with double glazing, which is an improvement, this is still considered a revenue expense, if single glazing material is no longer possible to purchase.
Setting up costs
If the property purchased was not in a fit state for letting and there were various expenses required to enable the property to be upgraded, these expenses are considered capital expenses. Also, if you need to purchase furniture when originally starting to rent the property, this will be considered capital expense.
Travel expenses
If you need to travel to visit the property, either by car, plane, or public transport, you can claim these expenses as a revenue expense. However, the trip must be solely for purpose of visiting the property. If you are non-resident landlord and fly to the UK for a holiday and to visit your property, the travel expenses are not allowable.
Mortgage Payments
If you have a mortgage for your rental property, you can only claim the mortgage interest payments. As per the current rules, mortgage interest amounts are not considered an expense to reduce your profit, rather it’s considered a tax relief to reduce your tax amount due. The current tax relief is 20% of the mortgage payments. If the relief exceeds the tax owed, you can carry forward unused tax relief to future returns.
