{"id":1719,"date":"2019-07-18T14:56:00","date_gmt":"2019-07-18T14:56:00","guid":{"rendered":"https:\/\/rita4rent.co.uk\/?p=1719"},"modified":"2023-09-19T16:59:39","modified_gmt":"2023-09-19T16:59:39","slug":"is-it-a-capital-cost-or-is-it-a-revenue-cost","status":"publish","type":"post","link":"https:\/\/rita4rent.co.uk\/blog\/is-it-a-capital-cost-or-is-it-a-revenue-cost\/","title":{"rendered":"Is It A Capital Cost, Or Is It A Revenue Cost?"},"content":{"rendered":"\n

Most landlords, when new to the industry, are genuinely surprised when they find out that they can\u2019t claim every bit of expenditure back against rental profits.  This article explores the differences between capital costs and revenue costs. <\/p>\n\n\n\n

First, the mortgage payment. Many accidental landlords believe that the whole of the mortgage payment \u2013 capital and interest – is deductible, when in fact, this is not the case at all. Historically only the mortgage interest payment was an allowable expense but even this is being phased out, and by April 2020 landlords will no longer be able to deduct any of it from their rental income, with a \u201creducer\u201d being available instead, typically equating to 20% of the mortgage interest. <\/p>\n\n\n\n

Second, once you\u2019ve bought an uninhabitable buy-to-let property and spruced it up to be, in your mind, habitable, the money you\u2019ve spent on doing the place up will be, in many cases, non-deductible against rental profits meaning you\u2019re faced with a higher income tax bill than you\u2019ve budgeted for. <\/p>\n\n\n\n

The second example deals with two areas of expense for landlords \u2013 revenue spending and capital spending. <\/p>\n\n\n\n

What is revenue spending?<\/h2>\n\n\n\n

Revenue spending consists of things that you spend money on which are temporary and must be done regularly. Examples of these are the costs of repair, maintenance charges, and renewal expenses (like re-painting walls, gardening, and so on). <\/p>\n\n\n\n

Revenue spending can generally be claimed against your rental profits to reduce your income tax. <\/p>\n\n\n\n

What is capital spending?<\/h2>\n\n\n\n

Capital spending generally describes one-off purchase costs like the cost of purchasing a home, costs involved in upgrading a home, legal charges and so on. <\/p>\n\n\n\n

Capital spend cannot generally be claimed against your profits, so you won\u2019t generally see a reduction in your income tax. <\/p>\n\n\n\n

Capital spending can often be claimed back when you come to sell your property. If you sell a residential property which is not your primary residence, you may have to pay 18% and\/or 28% on any gain you\u2019ve made on proceeds from sale, minus your expenses, subject to any allowances. <\/p>\n\n\n\n

Is your spending either like-for-like or an upgrade?<\/h2>\n\n\n\n

Like-for-like replacements are generally revenue spending \u2013 upgrades are usually capital spending. <\/p>\n\n\n\n

Take the example of a roof which has been badly damaged in a storm which needs re-tiling. Let\u2019s assume that the tiles that were used were the cheapest on the market. <\/p>\n\n\n\n

If you replace the tiles with similar tiles, you are making no improvement to the property as a whole from its previous state \u2013 therefore, it\u2019s revenue spending. If, instead, you choose to renovate the roof with expensive tiles and fit a couple of skylights, you have improved the fabric of the building from its previous state \u2013 therefore, it\u2019s capital spending. <\/p>\n\n\n\n

In their property income manual, HMRC use the example of a kitchen. If you replace a kitchen with like-for-like kitchen units, it\u2019s revenue expenditure. But what if, during the restoration of the kitchen, you add extra cupboards to the wall or increase the shelf space within the kitchen? Your spending on replacing old items and structures is revenue-spending, but the money you\u2019ve spent on the improvements is capital spending. You will need your tax advisor to help with the split. <\/p>\n\n\n\n

The major exception to this rule is around windows. Previously, if you replaced single glazed windows with double glazed windows, HMRC would consider this as a material improvement making it capital spending. <\/p>\n\n\n\n

However, they now accept this is an allowable repair and state in PIM2030: “Similarly, alterations due to advancements in technology are generally treated as an allowable repair rather than an improvement, if the functionality and character of the asset is broadly the same. For example, when single glazing is replaced with double glazing.”<\/em><\/p>\n\n\n\n

What about bringing a building up to a habitable state?<\/h2>\n\n\n\n

Not all mortgage companies will lend you money on a home which is not fit for human habitation unless you are a specialist property renovator with a proven track record. <\/p>\n\n\n\n

Costs incurred in bringing a property up to a habitable standard are generally capital, and therefore claimable when selling the property, rather than against income tax, although there are some exceptions. <\/p>\n\n\n\n

To finish, it is worth mentioning two famous and relevant tax cases in this area.  These cases explore the issue as to whether the property was fit for the purposes of letting at the date of purchase. <\/p>\n\n\n\n

The first case, back in 1923, was that of Law Shipping Co Ltd v CIR, and the second, more recently in 1971, being Odeon Associated Theatres Ltd v Jones. The shipping case concluded that costs needed to be incurred before the ship was fit for purpose, and therefore the costs were deemed to be capital. <\/p>\n\n\n\n

In the Odeon cinemas case, they were able to operate without carrying out the repairs, and therefore already strictly fit for purpose.  Therefore, the costs were deemed to be revenue. <\/p>\n\n\n\n

Talk to us<\/h2>\n\n\n\n

Not only is the legislation complex in this area, it\u2019s application by HMRC can be in many cases hard to predict. Taking advice before and after any expenditure is a wise strategy and is followed by those who dislike nasty surprises from the taxman. <\/p>\n\n\n

For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by\u00a0clicking here<\/a>.<\/p>\n\n

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