Property Repairs Deduction
Claim a Bigger Repairs Deduction
WITH MONEY still too tight to mention, many businesses are re-adopting the old wartime motto of ‘make do and mend’ and repairing their old property, equipment and other assets, rather than buying new ones.
One consolation for this new-found austerity comes from the fact that repairs expenditure is generally eligible for immediate and full tax relief. New purchases, on the other hand, attract tax relief at a variety of different rates; sometimes none at all. Property expenditure is a particular problem with limited tax relief for commercial property and usually none at all for residential.
Capital improvement expenditure is treated like a new purchase and this is where the greatest area of difficulty lies: knowing the difference between a repair and an improvement. It can make a huge difference to your business’s tax bill.
Gwen has an old office block with a damaged wall. If Gwen spends £50,000 to have the wall repaired, she will be able to claim tax relief for this expenditure. If she has the wall demolished and has an extension built for £100,000 she will get no tax relief at all.
No relief is allowed for the notional cost of repair work which would otherwise have been needed if the improvement had not taken place.
What is a Capital Improvement?
Judging whether something is an improvement is not a question of aesthetics or taste. Whenever you add something ‘extra’ to an asset which wasn’t there before, you’ve made a capital improvement and it means you cannot deduct the cost as a repair expense. If you built a new extension on the side of a Victorian building, it would be an ‘improvement’ for tax purposes - whatever Prince Charles might think!
Alterations will generally also be capital improvements, even if nothing is actually added. If you demolish a wall to combine two rooms into one, you will not have added anything, but it will still be a capital improvement.
Like For Like
Replacing ‘like for like’ will generally be a repair, unless:
- You replace an asset in its entirety, or
- The replacement is of a significantly higher standard
Each building and all its fixtures is generally regarded as a single asset for this purpose. Moveable items like machinery or furniture are separate assets.
For example, let us suppose you have a rental property with a separate garage at the rear. If you demolish the garage and replace it, this will be a capital improvement and no relief will be available. This is because the garage is a separate, stand-alone, asset and replacing it therefore constitutes capital expenditure.
Contrast this with replacing a staircase. As long as there is no improvement element to the expenditure, this would be allowable as a repair because the staircase is not a separate asset in its own right. If you widened the staircase at the same time, however, this would then be a capital improvement.
Where the replacement is of a higher standard, this will generally be regarded as a capital improvement. For example, replacing a porcelain bath with a marble one would be capital expenditure.
However, where the replacement is simply the modern equivalent of the original item, this is not regarded as an improvement and can be claimed as a ‘like for like’ repair. The best example of this is replacing single-glazed windows with standard double-glazed units and HMRC has specifically confirmed that this is accepted as a repair.
Certain items within commercial property are classed as ‘integral features’, including electrical systems, plumbing, heating, air conditioning, lifts and escalators. The good news is that these items qualify for capital allowances.
On the downside, however, expenditure on replacing part of an integral feature is classed as a capital improvement if such expenditure amounts to more than half of the cost of replacing the entire feature within any twelve month period.
Where significant repairs are taking place, it may therefore be worth staggering them over a longer period in order to avoid this problem.
Generally speaking, any expenditure which restores an asset to its original condition will be regarded as a repair. When we say ‘original condition’ though, we are talking about the condition of the asset when you first acquired it. If you buy a property with a hole in the roof, the cost of repairing that roof will be capital expenditure because you are improving on the condition of the property when you bought it.
In practice, normal repairs and redecoration work on newly acquired properties is usually considered allowable. Such expenditure will generally be regarded as ‘normal’ if the property could have been used without it.
For example, let’s suppose you buy a residential property as a ‘buy-to-let’. The property could be rented as it stands but is really in need of redecoration and will command a higher rent if this is carried out first. The cost of this redecoration work should be allowed as a deduction against your rental income.
If the property is severely dilapidated beyond normal ‘wear and tear’ however, HMRC might take the view that the work is so extensive that it has to be treated as a capital improvement. In these cases, the best way to ensure that the expenditure is allowed as a repair is to rent the property out first.
Owen buys a house that hasn’t been decorated since the 1970s. He carries out some work to ensure the house meets the necessary standards for a HMO (this work will be a capital improvement) and then rents it to some students for nine months. After that, he has the whole place redecorated. The cost of the redecoration is now an allowable deduction.
Where repairs are merely incidental to a capital improvement, the cost will all be regarded as capital expenditure. For example, you might have an extension built and then need to redecorate the adjacent room – this will all be capital.
If, however, you can put up with the slightly damaged decor in that adjacent room for a while, redecorating it later, in say a year or two, would be allowed as a repair.
Splitting the Cost
Although you cannot claim for repair work which is merely incidental to a capital improvement, you can claim the repair element of any work which has both repairs and improvement elements.
This is particularly common in residential rental properties where the landlord might replace a kitchen or bathroom. All the ‘like for like’ replacements of units, worktops, baths, sinks, etc, can be claimed as a repair. Only additional or higher standard items need to be treated as capital improvements. Incidental decorating work can be apportioned between the repairs and improvements on any reasonable basis.
Remember here that ‘higher standard’ doesn’t mean just more modern. If the only ‘improvement’ is a more modern material, it’s still a repair.
Splitting out your expenditure on an ‘item by item’ basis can yield significant benefits in the shape of deductible repairs expenditure. In this way, you can improve your property and still get your tax relief.