Buying and renovating a property
Will you get tax relief for say £50k of repairs that you are planning to do at the new premises that you have recently acquired with a view to renting it out.
The following link details HMRC’s opinion https://www.gov.uk/renting-out-a-property/paying-tax
Allowable expenses do not include ‘capital expenditure’ – like buying a property or renovating it beyond repairs for wear and tear.
- If the expenditure is “Capital” it gets added to the cost of the property and you get tax relief when you sell.
- If the expenditure is “Revenue” you get tax relief against income.
Deciding if the repairs represent a Revenue cost :
Click here to read the full HMRC guidance The relevant part is duplicated here:
Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the customer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:
A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the customer makes the repairs just after they acquire the asset.
The customer makes an agreement that commits them to reinstate the property to a good state of repair. For example, Fred is granted a 21-year lease of a property in a poor state of repair by his landlord that he, in turn, sublets. When Fred’s landlord grants him the lease Fred agrees that he will refurbish the property. Fred’s expenditure on making good will be capital expenditure and not allowable. But Fred’s landlord may be chargeable on the value of the work under the premiums rules (PIM1200 onwards) and Fred may qualify for some relief (see PIM2230 onwards).
My loose interpretation if the fully renovated property is worth say:
- Value: £450k and you pay £330k being – £280k (for the premises) + £50k (repairs) which combined make it worth £450k, then the £50k is most likely capital.
- Value: £310k and the £330k spent puts it into a liveable state without actually improving the property (i.e. without making it worth more that £310k) then there is probably a fair degree of repair included in the £50k.
This is an area which can involve a lot of work. My advice is to ensure that the builder provides a full costed itinerary of the works that they are undertaking and makes it as clear as possible such that the above question of “is it capital or revenue” is very easy to interpret. This would also present a strong argument to HMRC if they were to ever challenge the costs.
I hope that you have found this interesting and that some of the links prove to be of help. If you however you would like some structured advice then please be sure to get in touch:
This blog came about as part of an exercise looking into Stamp Duty. Feel free to click here to read it. https://www.darrallandcompany.com/stamp-duty-land-tax-sdlt