Maintenance v Capital Works

[banner257]

Has anyone any straight forward guidance on what is maintenance cost tax allowable. If I install a new bathroom suite as the existing one is past its best is that maintenance replacement or capital improvement? What about renewing electrical wiring, painting the house out, replacing guttering, replacing kitchen units, renewing garden path as existing is dangerous. Replacing leaking radiator.

[TaxationPete]

Such like for like repairs are revenue. However, for example, if you converted an old bathroom into a fully tiled wet room with power shower and all the fittings then it could be deemed a capital enhancement. Regards Peter

[banner257]

Revenue v Capital

Peter
Thanks for that, I can understand it is a capital item in your example, but. What is it in the case of having to replace all the electrical wirering when it was dangerous.
Regards
Eric

[Ericthelobster]

What is it in the case of having to replace all the electrical wirering when it was dangerous.

That's clearly a maintenance issue.

Is this in a property which you're already letting, by the way, or is it one you've recently bought and are doing up in readiness for letting?

[Telometer]

Well it's amaintenance issue if merely all the wiring is replaced. If on the other hand it is substantially upgraded - more sockets, more lights, higher grade cable for a better electric shower etc., then these items are capital.

[banner257]

That's clearly a maintenance issue.

Is this in a property which you're already letting, by the way, or is it one you've recently bought and are doing up in readiness for letting?

I just about finished doingit up, but the electrics were in a bad state.
Thanks

[Telometer]

Did you acquire the house cheaply with a lot of work needing to be done?

[banner257]

Hi
I purchased the house at a good price, I am expecting/ spent the following:-
£3k for replacement windows, Plastering £1k, Electrics £800, Electrical test £100, Carpets £1k, New skirtings etc £500, Painting £800, Intruder Alarm £200, replaced 3 radiators £200.
I have done a lage amount of work myself.
Thanks

[dominicr]

See http://www.hmrc.gov.uk/manuals/pimmanual/PIM2020.htm

In general the costs of putting a new purchase into usable condition are capital.

For a property you already own, renewal without improvement is allowable. Some improvements are allowed if they reflect changes in building regs/general usage. For instance, HMRC have stated that they now allow replacement double glazing as a deductible expense (but this again would refer to an existing property, not a new purchase with wrecked windows).

Seems to me that rewiring if the old wiring is substandard should be allowable (on an existing property).

I don't think the cost of your own labour is deductible in any circs, unfortunately.

[banner257]

dominicr
Thanks for the help. If I charged for my labour then they would want income tax from me.
Regards

[dominicr]

dominicr
Thanks for the help. If I charged for my labour then they would want income tax from me.
Regards

Yes it would so there wouldn't be much point. And still worse if it creates taxable income for you but a non-deductible capital expense for your business! I suppose if some other member of your family, who didn't have taxable income, had done the work and invoiced you (at a market rate) for it, it would be okay; but it's still a capital item for your business if it's on a new property.

Note that if the property is an HMO then some capital items in common areas can be eligible for 20% WDAs. The rules were tightened up on this a few months ago but the fundamental point stands, I think.

There are also LESAs, http://www.hmrc.gov.uk/manuals/pimmanual/pim2072.htm, giving 100% tax deduction of eligible spending up to £1500 per house or flat per year.

[Telometer]

I'm finding it difficult to work out from what you have posted.

But if you recently acquired this property in a run down state and spent all the money on it prior to letting it out then it is likely that all the expenditure is rather more capital in nature than revenue.

[dominicr]

Yes, you are correct. But some HMO capital items in common areas can quality for WDAs, and LESA-eligible items would also be eligible for tax relief. So in both cases the expenditure is capital, but you get 20% writing-down allowances or 100% first year allowance respectively. However with a dilapidated house, even an HMO, this is only likely to cover a small part of the total cost of refurbishment.

Might there be an argument with some expenditure on a new property, such as decoration and minor repairs, that it is the type of spend that is regular in nature - not part of the initial refurbishment but just part of the regular upkeep i.e. it is ongoing and just so happens, at this point in time, to fall at the beginning? In which case it might be allowable as a revenue expense. I think the key point would be that such expenditure is not actually necessary to put the property into lettable condition (because you could arguably let it with decor in a poor state), nor does it constitute a capital improvement, but merely gives the property a short-term boost in lettability and hence income potential, so the cost should be set against income.

[banner257]

Thanks all who have kindly responded with good information. I now pose the question as follows: do I just say with the setup as renting as a side line, or do I form a property company, what would the tax advantages? Would there be other ways of paying less income tax from the income?
I am new to this venture of renting out, as a retired Charted Builder I thought I would put my skills to doing up good investment properties.
All comments welcome.
regards all

[dominicr]

do I just s[t]ay with the setup as renting as a side line, or do I form a property company, what would be the tax advantages? Would there be other ways of paying less income tax from the income?

I would say avoid setting up a company at all costs. If you are a higher-rate taxpayer then it is true that the corporation tax rate will be lower than your personal rate; but if you ever want to get the money out of the company and into your own hands you will suffer much higher overall tax, whether you pay yourself as a director or by dividends. And if you ever want to wind up the company you will find that having already paid tax on any capital gains or accumulated income - as corporation tax - you will then pay again on the shares at wind-up (or sale) of the company.

Also your company will not have a 'trade' for tax purposes so many of the advantages of small companies such as Business Property Relief (which means they escape Inheritance Tax) won't apply.

Another consideration which may or may not matter to you is that UK companies have to file accounts which are easily accessible online to anyone.

It is a real shame that a company structure is so tax-inefficient for property ownership - and a huge barrier to increased professionalism in the PRS. The government is presently consulting on changing the rules for REITs (Real Estate Investment Trusts) - a tax-efficient corporate structure for property companies but only presently permitted for quoted businesses. It is just possible that they will decide to widen the net to make these a tax-effective vehicle even for small landlords such as yourself, but don't count on it...