Expenditure spent on improving, maintaining and repairing a property fall into two different categories - revenue and capital. Both of these have different tax impacts and it’s important to understand the differences between the two.
Revenue expenses are deducted from a company’s rental income and reduce the profits. They're tax deductible expenses in the year that they're incurred.
Typically, any routine maintenance costs incurred during the course of letting out a property would be revenue expenditure. A few examples include:
Replacing roof tiles
Fixing a broken boiler
The cost of redecoration between tenancies
Repairing water or gas leaks and electrical faults
Any ‘like for like’ replacements of part of the property would also be revenue expenditure and this includes replacing parts with the nearest modern equivalent. An example of this would be replacing single glazed windows with double glazed windows. If you replace a kitchen with items similar to the original kitchen and the character is unchanged, the costs would be allowable expenses.
You don’t receive tax relief on capital expenditure until you sell the property. When you sell a property, the company pays corporation tax on the difference between the sale proceeds and the cost of the property. Any capital expenditure is added to the cost of the property and reduces the overall gain.
Generally, costs which improve the property and add value would be treated as capital expenditure. The common types of capital expenditure are:
Adding anything new to the property - this improves the property and is capital expenditure. Examples of this include adding a conservatory or an extra bedroom and it can also include smaller items such as putting in additional kitchen units that weren't there before.
Upgrading with more than the nearest modern equivalent - this is also capital expenditure. Using the example of a kitchen, if you replaced standard units for higher quality upmarket units, the cost of these would be capital.
Costs associated with the purchase of the property - these include legal fees, stamp duty and survey charges.
As noted above, the initial costs associated with the purchase of the property are capital expenditure. Any initial work done to a property before it's let out will also need to be classified as revenue or capital.
Generally, the above guidelines can be used however if work done is to get the property to a condition where it can be rented out, it is normally treated as capital, even if the property is just being restored to its original state. For example, if a property is in a run-down state and the repairs are necessary to attract tenants and the purchase price reflected the run-down state.
On the other hand, if the property could have been rented in the condition it was purchased and the repairs are routine it’s an indication that the expenses are revenue and not capital.
If you furnish your property before letting it out, no tax relief is available on the initial furnishings. However relief may be available for the replacement of certain domestic items, you can find out more information on ‘replacement of domestic items relief’ here.
The distinction between revenue and capital expenditure is not always obvious. Please get in contact if you are unsure.