Capital or Income Item?

[weststreet]

I own and rent out two flats in a converted house ( four in house ). I bought both flats at undervalue ( subjective ) because the flats were in a state and the house was in need of a substantial refurb. Usual scenario leasholders had no money ( one was a repo ) and no-one pushing/controlling.

Anyway both flats have been refurbished and have been rented out for one year and six months respectively. House is finially de to be done and money being collected via managing agent. Refurb cost approx 25K and new fire alarm installation approx 3K. Obviously I'm liable for 50% so 14K from me.

Can I offset these charges against income or do they have to be treated as capital ( mainly because of the size ) ? Thanks.

[Grange]

Size is irrelevant. If you'd owned the house for 30 years then it would all be repairs (except to the extent that it was improvment).

That you ask the question suggests that these are capital costs... but it's difficult to tell without knowing the full circumstances.

[weststreet]

hi Grange

Breakdown is very approx :
Roof replacement/repair ? 12K plus VAT. Has been leaking and repaired so effectively a replacement. Reuses old slates, new timbers, any rotten timber etc. Repairs to chimney stack. Replace guttering. Replace one common parts Velux window.
Rerender approx 6K plus VAT. Old render falling off in places. Hack off and replace.
Decorating approx 4K plus VAT. Painting new render, painting/repairing wooden windows. Replacing 'fancy' bits of shutters, door entrance frame.
Fire Alarm System approx 3K plus VAT. Replacement of old system, utilising some of old. Replaces existing cables etc which was defective.

The above is very ballpark. It's a Grade 2 listed building so pricier than normal for the works.

What do you think? Everything will be billed as 'one-off' service charges by the managing agent.

[Grange]

So when you bought the place:

The roof leaked; the chimney stack was about to fall off, the render was falling off, the wooden windows were ful of rot - likewise the shutters and door frame - and the fire alarm was defective.

No wonder the place was knock-down price. Accordingly the expense is capital in nature.

[weststreet]

So when you bought the place:

The roof leaked; the chimney stack was about to fall off, the render was falling off, the wooden windows were ful of rot - likewise the shutters and door frame - and the fire alarm was defective.

It had potential !!

Seriously, you think capital because of the time-frame ie the fact I've only owned one of the flats 12 months and the other 6 months ? You mentioned improvements earlier - none of these are. Just substantial refurb of a badly neglected building.

Thanks for your input.

[Grange]

If in your book replacing a leaking roof with a non-leaking roof does not constitute an improvement, then...

Have a read of hmrc's internal guidance - link below. Concentrate on the "law shipping" part of the guidance. It's not that the repairs constitute improvements. It's that you paid a low amount for an asset because of it's condition.

You could either have paid 100k for a dilapidated house and spent 10k on it to bring it up to standard, or (if we ignore the profit element) you could have paid 110k for the refurbished version. There is no reason for the tax treatment to be any different in these two scenarios.

If, of course, any of your repairs relate to things that failed suddenly during your period of ownership, then you can claim a deduction for that. But the roof has been failing for the last 100 years...

http://www.hmrc.gov.uk/manuals/bimmanual/BIM35455.htm

[weststreet]

Ok Grange and thanks.

Can I ask a further question which is a bit naughty.

How would HMRC know that the building was delapidated and this likely refurb cost was built into the purchase price ? I'm not naive here, yes they were 'cheap' and a comparison with others would show this. But truthfully both were un-mortgagable ( hence lower price ) because flat a) was a tip full of dog debris ! and flat b) needed gutting with severe damp probs ( 10K ). Plus there were legal questions ( what freeholder actually owned and missing parking spaces ) which are being resolved now. It was a dog's breakfast hence only a cash buyer would be interested. All these factors influenced the low prices paid.

The external refurb was jst another factor. Factually the building was converted from a hotel in 1995 so 'on the surface' should have been in fairly good nick but had cowboy converters. Eastate agents blurb make no mention of the conditions of the externals.

Just wondering, if I chanced it and put the cost against income, is it likely to be questioned ? Sorry - I promise this is the last question

[Grange]

I'm told that the porridge at Wormwood Scrubs isn't the best. And with tax geared penalties to pay as well.

When you are up in court you will be swearing on oath that you were completely ignorant of the law. You'll get a good sentence for perjury.

[weststreet]

Ok point taken