Understanding Tax Deductible Repairs and Renewals
Understanding what are tax deductible repairs and renewals is crucial. Because where an expense is considered an enhancement it's not allowed when incurred.
Is it an enhancement or renewal?
Any expense enhancing or changing an asset’s nature is regarded as capital. So it won't be regarded as tax deductible repairs and renewals. For example, replacing old plastic guttering with new copper guttering is an allowable revenue expense.
Whilst the new gutter improves the property, it doesn’t change its function. However, adding a gutter to a building that never had one is capital expenditure. As a result, the new gutter adds a function, changing the asset's nature.
Repairs using modern techniques and materials nevertheless still count as repairs. Therefore you should assess each repair individually. What's more, new materials appear on the market daily. Moreover, any quotes and invoices should clearly explain what has been done. Furthermore, HMRC's internal guidance details how they determine whether expenditure is either an improvement or repair.
You should only claim the repair incurred as an expense. In other words, you cannot claim amounts recovered via insurance or tenants. For example via a Tenancy Deposit Scheme.
What about dilapidations?
In a let building, dilapidations fall to the landlord or tenant, depending on the lease terms. Dilapidations usually count as capital expenditure, not as repairs for wear and tear.
Furthermore, if a tenant pays the landlord for dilapidations, this offsets the landlord’s costs. As a result a landlord can't claim these costs against rental income. Additionally, if a tenant leaves without paying for dilapidations, the expense nevertheless remains capital and not tax deductible repairs and renewals.
Wear and Tear vs Dilapidations
Normal wear and tear, such as periodic painting or replacing rotten windows, counts as repairs and is therefore tax deductible against income. What's more, if a tenant damages flooring, changes wiring unsafely, or removes a door without replacing it, the cost to fix these issues is treated as a dilapidation.
Because it can't be claimed as a deduction against income it's important to agree a schedule of dilapidations with an outgoing tenant.
New Assets and Pre-Trading Expenditure
Work done in order to make an asset usable in a business is regarded as capital unless the asset was usable in its acquired state. However, if the asset was purchased at a discount due to poor condition any major repairs after purchase would indicate expenditure is of a capital nature. Therefore, it would not be considered as tax deductible repairs and renewals.
An example
Tony buys a flat with a £12,000 discount due to a rotten fire escape and leaking roof. He spends £17,000 on repairs, redecorating, and replacing carpets and the kitchen sink. Tony treats £5,000 as a revenue expense for non-essential repairs at the time. This approach helps him manage tax deductible repairs and renewals effectively.
Repairs and integral features
Special rules apply to repairs to integral features. Replacement of an integral feature occurs when costs exceed 50% of the replacement cost within 12 months. Replacement expenditure isn't deductible against income but is eligible for capital allowances.
Property Letting and Tax Deductible Repairs and Renewals
For residential property letting businesses, the integral feature restriction doesn’t apply so they claim Replacement of Domestic Items instead.
Therefore expenditure on refurbishment between lettings is treated as capital, subject to the Replacement of Domestic Items Relief rules.
Summary
Understanding the difference between capital and revenue expenditure ensures you correctly claim tax deductible repairs and renewals. As a result this knowledge will help optimise your tax treatment and navigate complex tax scenarios effectively.
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