In between tenants you are doing some work on your rental property. How these are categorised, as repairs or improvements, determines whether or not you’re entitled to an income tax deduction. What factors should you consider?
Improvement or just repair?
As a rule, a “revenue” tax deduction can’t be claimed for the cost of improving your property. A revenue deduction reduces the amount of rental income liable to tax. Instead, the cost is “capital” and so deductible when working out the capital gain or loss you make when you sell the property. You might therefore have to wait decades for a tax deduction.
Conversely, the cost of repairing a property is a revenue expense and so reduces the income tax bill on rent for the year of expenditure.
Sometimes the distinction between a repair and an improvement is not clear and the tax legislation doesn’t provide any help. For example, if you add a conservatory to your rental property, it’s an improvement cost. But what if you completely replace an existing conservatory that had become dilapidated?
As a rule, an addition to a property, e.g., creating a new room by converting a loft or garage, will always be an improvement.
Partial or total repair?
The replacement of an entire element of a property may be a repair or an improvement. The scale and cost of works are not usually a factor. For example, the roof of your property was lost in a storm and replaced with equivalent materials; that would be a repair despite improving the value of the property. Historically HMRC would consistently argue that a repair that significantly affected the value of a property should be treated as an improvement (and so a capital expense) for tax purposes. These days its approach has softened.
As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. However, you should be aware that there’s an exception for such expenditure where the repair work is carried out on a property soon after purchase and the cost of the repairs was reflected in the price paid for the property.
Repairing or replacing equipment which is fixed to the property and has effectively become part of the structure, e.g., a heating system including a boiler, is treated in the same way as the structure. For example, a like-for-like replacement boiler and radiators is a repair and the cost qualifies for a revenue deduction. However, if the work included the addition of an extra radiator, the corresponding proportion of the cost would be capital.
As a rule of thumb, a like-for-like repair or replacement using similar materials to the original counts as a repair regardless of the scale. This applies to the structure of the building and to equipment fitted to it such as boilers and water systems.