It is important to be able to distinguish between tax-deductible repairs and renewals. But what is the difference between them?
Enhancements vs. Renewals:
Any changes or enhancements made to an asset are considered capital, meaning they are not tax-deductible repairs or renewals. Allowable revenue expenses are improvements to a property without changing its function, e.g. replacing an old wooden door with a new steel one. However, if a new steel door were added to a property that never had one, this would be capital expenditure. The door adds a new function to the asset which changes the asset’s nature.
Repairs that use modern materials or techniques still count as repairs. So each repair should be assessed individually, with quotes and invoices to explain the work. If you are still confused about expenditures, HMRC guidance will help determine whether it is a repair or a renewal.
Dilapidations vs. Wear and Tear
Tax deductible repairs would be granted to normal wear and tear, e.g., painting and replacing windows. Any damage caused by a tenant, e.g. missing doors or broken flooring, would be considered dilapidation.
New Assets and Pre-Trading Expenditure
Any work done to make an asset usable in business is considered capital. Major works on an asset may mean it is sold at a discounted price, this would be considered expenditure of a capital nature. For example:
A cottage is bought with a £15,000 discount due to a cracked foundation and broken windows. £20,000 is spent on repairs, repainting, installing new windows, and replacing the bathroom fixtures. £6,000 is put down as revenue expenses for non-essential repair. This approach helps to manage tax-deductible repairs and renewals effectively.
A capital expenditure will bring value to a property. Improvement & refurbishment expenditures will reduce the capital gains tax when the property is sold/disposed of.
Repairs are to maintain a property, these expenses are claimed as a revenue expense in accounts and will reduce income tax.
It is important to keep good records and distinguish between capital and revenue expenses to easily establish what you can claim.
Contact your account manager if you have any questions or queries about this topic.
