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UK Property Tax Portal
Tax Articles
 Lee Sharpe looks at two case studies for landlords incurring typical expenses on new property. The two case studies in this article compare and contrast the following typical scenarios when buying a new rental property: • Charles’ townhouse was formerly occupied by a couple who did little maintenance: although it is technically habitable, it will require a programme of updating before he is happy to let it out. • Lucie’s vacant townhouse is in a rather more dilapidated state and will need essential work before it may be let out. Aim of the case studies Maintaining/repairing a property is a ‘revenue’ expense, which may be deducted against rental income, while improving a property is a capital expense which cannot be deducted from rental income (although is potentially allowable when the property is sold). It could be argued that any work on a property is an improvement – there would be no point otherwise – so the aim is to give landlords, etc., an appreciation of the fundamentals in relation to property letting – primarily residential. A series of case studies will put typical ‘real-world’ examples to the following principles:
Case Study 1: Charles An older couple lived in Charles’ property until they moved out a few weeks ago. There has been no significant maintenance work for many years, although the asking price for the property is not materially less than if it would have been if the property were fully modernised since, in classic estate agent-speak, it ‘allows the new owner to set their own stamp on the property’ without actually having to rebuild it. Charles wants to let to a discerning market and he therefore wants to incorporate a high-standard kitchen as a key ‘selling point’. Before he first lets the property, he will:
Bathroom Charles replaces all the white goods with decent quality fittings sourced from a local supplier. He adds a separate shower cubicle, and re-tiles the bathroom. He also replaces a window, which has started to rot. The bathroom is vastly improved on its previous condition but the test is ‘quality of new fittings versus quality of old when first installed’ and as such the originals are comparable, and the cost of the items, materials and installation are all deductible. Since there wasn’t previously a separate shower unit, this would be an improvement and its cost would not be allowable. Whilst the cost of the shower fittings is probably separately identified on his plumber’s bill, the labour may not be analysed so a reasonable apportionment of the labour costs would be in order, to disallow the portion attributable to fitting the shower. On the basis that the tiling is again of comparable quality to its predecessor, the tiling should be allowed. Charles cannot claim for costs he has not actually incurred, so he cannot include anything for the cost of his time for tiling. The new double-glazed window may be technically superior (in terms of insulation and sound-proofing) to the original single-glazed window but it is now accepted by HMRC that a modern replacement window will be double-glazed by default, so may be claimed as a repair unless deliberately superior materials are used. High-quality kitchen Unsurprisingly, Charles’ deliberately sourcing a ‘designer’ kitchen in place of a quite standard quality original, (say) 15 years old, comprises an improvement. It may make good commercial sense to ensure Charles has the pick of good quality tenants, but there will be no tax relief for the substantive quality upgrade. In fine detail, there may be elements which are ‘like for like’ such as re-painting the ceiling, or replacing wall sockets, and their attendant materials and labour costs could perhaps be claimed as revenue. Practically speaking, however, Charles should realise he stands to glean little tax relief on this expenditure (although he may be able to claim enhancement cost for capital gains tax if and when he sells the property – assuming that kitchen is still in place). Floor coverings and re-decoration Ironically the carpeting, although old, was originally of a high quality throughout. Charles doesn’t see the point of using premium floor coverings in a rental property and uses normal quality carpets to replace them. He should get tax relief on his expenditure and, provided he doesn’t commission Banksy to re-paint the walls, there should be no issues with claiming a deduction for re-decorating either. Case Study 2: Lucie Lucie buys an older townhouse for what she initially thinks is a good price. Unfortunately, as the survey progresses, no amount of estate agent’s gloss can hide:
Lucie realises she will have to address these issues if she wants to keep any future tenants happy. However, while a ceiling and a carpet have been damaged by the leak, the rest of the house is in relatively good shape cosmetically, so little other work is required. Underpinning The collapsing foundations are a serious threat to the integrity of the building, and the main reason why the current owner has had difficulty in selling at the normal market rate. It might not be possible to insure the property for letting. The projected cost of remedial works is substantial and Lucie and the vendor therefore agree to ‘meet halfway’ in terms of adjusting the asking price. The work is a capital improvement as far as Lucie is concerned as she is buying a substantively impaired asset and the cost will not be allowed against rental profits (note that if the subsidence had appeared sometime after purchase and had not therefore featured prominently at acquisition, then it would be an allowable repair, required to maintain an asset to its existing standard as far as Lucie were concerned). Leaking roof Lucie’s surveyor advises that a couple of ridge tiles are missing, but the roof is essentially fine. Although it would make the property very difficult to let if ignored, the problem is easily treatable and the damage so far is basically cosmetic; the price is not affected. Making good/replacing the carpet will be a revenue expense. Damp-proof course The DPC is progressively worsening, but that is to be expected in a property of such age. Lucie would prefer to address the problem sooner rather than later but it has no material effect, on its own, on whether or not the property could be let. If the surveyor had found the property to be rife with damp, then the cost of making good might be capital (and figured in the purchase negotiations) but at this stage, it is a warning only. Lucie may choose for convenience to address this now, before letting commences, but the cost should be allowed as part of the property’s routine maintenance cycle. Conclusion Future case studies are planned, such as houses with multiple occupation conversions and repairs following a nightmare tenant. Feel free to write in with any scenarios you have in mind. This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.
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