Capital vs Revenue Expenses

Understanding the difference between capital and revenue expenses is essential for getting your tax right. Claim a capital expense as revenue and you'll overclaim — claim a revenue expense as capital and you'll underclaim. This guide explains the distinction, covers the main tests HMRC uses, and shows you how to handle the grey areas.

Why the distinction matters

HMRC divides your property expenses into two categories:

Revenue expenses are allowable against your rental income. They reduce your taxable profit and lower your tax bill. Examples include repairs, insurance, and letting agent fees.

Capital expenses aren't allowable against rental income. You can't claim them as expenses when working out your profit. But you should keep records of them — they may reduce Capital Gains Tax when you eventually sell the property.

The impact on your tax:

If you have £15,000 in rental income and £5,000 in revenue expenses, your taxable profit is £10,000. If you mistakenly treat a £2,000 capital expense as revenue, you'll claim £7,000 in expenses and declare only £8,000 in profit — which is wrong. Conversely, if you treat a £2,000 repair as capital, you'll pay tax on £12,000 instead of £10,000.

Getting this right matters for quarterly updates, your final declaration, and future Capital Gains Tax calculations.

What makes an expense revenue

Revenue expenses are the running costs of your rental business. They keep the property operational and maintain it in its current condition.

Characteristics of revenue expenses:

They don't improve the property beyond its original state
They're recurring or routine in nature
They maintain or restore what's already there
They don't add significant value to the property

Common examples:

Redecorating between tenants
Fixing a broken boiler
Replacing worn-out carpets with similar quality
Repairing roof damage after a storm
Routine maintenance and servicing

For a complete list of allowable revenue expenses, see Allowable expenses.

What makes an expense capital

Capital expenses enhance, improve, or add to your property. They create lasting value and are typically one-off costs rather than recurring.

Characteristics of capital expenses:

They improve the property beyond its original condition
They add something that wasn't there before
They upgrade or enhance what exists
They increase the property's value or extend its life significantly

Common examples:

Building an extension or loft conversion
Installing central heating where there was none before
Adding a new bathroom or kitchen
Initial costs of furnishing a property when first let

Capital expenses should be tracked separately. When you eventually sell the property, they may reduce your Capital Gains Tax liability by increasing your acquisition costs or qualifying as enhancement expenditure.

The repair vs improvement test

The line between repairs (revenue) and improvements (capital) is one of the most common areas of confusion. HMRC's test is straightforward in principle but can be nuanced in practice.

Restoring to original condition = repair

A repair restores an asset to its previous working condition without making it better than it was before. You're fixing what's broken or worn out, not upgrading.

Examples of repairs:

Repainting walls and woodwork
Replacing a broken boiler with a similar model
Fixing roof tiles that blew off in a storm
Replacing worn carpets with comparable quality
Mending broken fences or guttering

Enhancing or adding new = improvement

An improvement makes the property better than it was before. You're enhancing its condition, adding features, or upgrading quality.

Examples of improvements:

Extending the property or adding a conservatory
Knocking down walls to create open-plan space
Replacing a basic kitchen with a luxury one
Installing a new heating system where there was none before
Upgrading from laminate flooring to hardwood

Grey areas: incidental improvements

If you replace something with the nearest modern equivalent as part of a repair, HMRC may still treat it as a repair even if there's some incidental improvement.

Example: double-glazing

Replacing old single-glazed windows with modern double-glazed windows can be a repair if:

The windows needed replacing due to age or damage
Double-glazing is now the standard modern equivalent
The improvement in energy efficiency is incidental to the repair

But if you're upgrading perfectly functional single-glazed windows as part of a renovation project, that's an improvement (capital).

The key question is: are you restoring the property to working condition, or are you deliberately enhancing it?

Initial costs vs ongoing costs

The timing of an expense affects how it's treated.

Furnishing a property initially = capital

When you first furnish a rental property, the initial cost of furniture, appliances, carpets, and fittings is capital expenditure. You're setting up the property for letting, not replacing worn items.

What counts as initial furnishing:

First sofa, beds, wardrobes provided to tenants
First carpets and curtains
First appliances (fridge, washing machine, oven)
Initial kitchenware and crockery

You cannot claim these as revenue expenses. But they may qualify for other reliefs (see replacement relief below).

Replacing worn-out items = may qualify for replacement relief

Once the property is let and items wear out, replacing them may qualify for replacement of domestic items relief (for residential lettings only). This is a special revenue deduction that sits between pure capital and pure revenue.

Replacement of domestic items relief

This relief allows you to claim the cost of replacing furniture, furnishings, appliances, and kitchenware in residential lettings. It was introduced in April 2016 to replace the old wear and tear allowance.

What it is

Replacement of domestic items relief lets you deduct the cost of replacing movable items provided for the tenant's use. It's only available for residential property — not commercial property.

The relief recognises that landlords need to replace worn-out items regularly, and treating these costs as pure capital would be unfair. But it's not a blanket allowance — specific conditions must be met.

Who can claim

You can claim replacement of domestic items relief if:

You let out residential property (a dwelling house)
You're replacing an item that was previously provided for the tenant's use
The old item is no longer available for the tenant to use
The new item is provided exclusively for the tenant's use

What doesn't qualify

You cannot claim this relief if:

You're furnishing a property for the first time (initial purchases are capital)
You let out commercial property
Your rental income qualifies for Rent-a-Room relief
The item is for your own use, not the tenant's

Items covered

The relief covers domestic items that tenants use in their daily lives:

Moveable furniture:

Beds, sofas, chairs, tables
Free-standing wardrobes and cabinets
Desks, bookcases, mirrors

Furnishings:

Curtains, blinds, cushions
Carpets and rugs
Linens, towels, bedding

Household appliances:

Fridges, freezers, washing machines
Televisions, vacuum cleaners
Ovens, microwaves, kettles

Kitchenware:

Crockery, cutlery, glasses
Pots, pans, cooking utensils
Toasters, food processors

What's excluded:

Fixtures and fittings that are part of the property (fitted kitchens, bathroom suites)
Items you claim capital allowances on elsewhere

The upgrade cap: claiming when you improve on the original

If you replace an old item with a better or more expensive version, you can only claim the cost of a like-for-like replacement. The extra cost for the upgrade is not allowable.

When an item counts as an improvement

A new item is an improvement if:

It has different functionality (e.g., replacing a sofa with a sofa bed)
It's made from upgraded materials (e.g., replacing synthetic carpets with wool)
It's a higher specification or quality than the original

When it's not an improvement

A reasonable modern equivalent is not treated as an improvement, even if it's technically better than the original.

Examples of reasonable modern equivalents:

Replacing an old fridge with a new energy-efficient model (same functionality, better efficiency)
Replacing a worn sofa with a similar modern sofa in better condition
Replacing damaged laminate flooring with modern laminate (same type, newer)

The key test: does the new item do the same job, or does it do more?

Example: sofa to sofa bed

You originally provided a standard two-seater sofa that cost £400. It's now worn out, and you replace it with a sofa bed costing £550.

The calculation:

Cost of like-for-like replacement (similar sofa): £400
Allowable deduction: £400
Disallowed (upgrade to sofa bed functionality): £150

You can claim £400 as a revenue expense. The £150 difference is capital.

Example: reasonable modern equivalent

You replace a 10-year-old fridge that cost £300 with a modern energy-efficient fridge costing £350.

The calculation:

The new fridge performs the same function (it's still a fridge)
The energy efficiency improvement is incidental
The new fridge is a reasonable modern equivalent

You can claim the full £350. There's no upgrade cap because the functionality hasn't changed.

Mixed expenses (partly capital, partly revenue)

Some expenses contain both capital and revenue elements. When this happens, you must split the cost and treat each portion correctly.

When mixed expenses occur:

Repair work that includes some enhancement
Renovation projects that restore some areas and improve others
Replacement items where the new version is an upgrade

How to split and record

Identify the revenue portion (the repair or like-for-like replacement cost)
Identify the capital portion (the enhancement or upgrade element)
Record each separately in Provestor

Recording in Provestor

Provestor handles capital and revenue expenses separately to ensure your quarterly updates and final declaration are accurate.

Recording wholly revenue expenses

Most day-to-day expenses are purely revenue. Record them as normal:

In your business workspace, navigate to the Cash or Bank account where you paid the expense
Add the transaction
Categorise using the appropriate expense category (repairs, insurance, letting agent fees, etc.)
Link to the relevant property

Provestor includes these in your quarterly updates and final declaration automatically.

For detailed guidance, see Capturing expenses.

Recording wholly capital expenses

If an expense is entirely capital (e.g., building an extension), record it but mark it as capital:

Add the transaction as above
In the advanced options, enter the capital portion, and enter the full amount of the expense
Provestor excludes this from your quarterly updates but keeps it in your records for future Capital Gains Tax calculations

Capital expenses don't reduce your rental income, but tracking them ensures you have accurate records when you eventually sell the property.

Recording mixed expenses

For expenses that are partly capital and partly revenue:

Add the transaction
Enter the total amount paid
In the advanced options, enter the capital portion
Provestor automatically calculates the revenue portion and submits only that to HMRC

The capital portion is excluded from quarterly updates but remains in your records.

Recording replacement of domestic items

When you replace furniture, appliances, or furnishings under the replacement relief:

Add the transaction
Enter the cost of the new item
If the new item is an improvement on the old one, use the "Original item cost" field in the advanced options to enter the like-for-like replacement cost (the upgrade cap - Provestor will record the lower of the two amounts in your quarterly updates)
If you sold or part-exchanged the old item, enter the proceeds received
Provestor calculates the allowable deduction automatically

Why capital expenses still matter

Even though you can't claim capital expenses against rental income, they're not worthless. They play an important role when you sell the property.

Not allowable against rental income

Capital expenses don't reduce your taxable profit from renting. If you spend £20,000 on an extension, it won't reduce this year's rental income for tax purposes.

Tracked for Capital Gains Tax

When you sell a rental property, you may have to pay Capital Gains Tax on the profit you make. Capital expenses can reduce this tax bill in two ways:

Enhancement expenditure — Improvements you made to the property can be added to your costs, reducing the gain
Incidental costs of disposal — Some capital costs incurred when selling can also be deducted

Example:

You bought a property for £200,000. Over 10 years, you spent £30,000 on capital improvements (extension, new kitchen). You sell it for £300,000.

Without tracking capital expenses:

Gain: £300,000 - £200,000 = £100,000

With tracked capital expenses:

Gain: £300,000 - £200,000 - £30,000 = £70,000

The capital expenses reduce your taxable gain by £30,000, which could save thousands in Capital Gains Tax.

Provestor keeps records for future CGT calculations

When you mark an expense as capital in Provestor, it's excluded from your rental income submissions but stored in your property records. When you eventually sell, these records will support your Capital Gains Tax calculation.

For more on how capital expenses affect CGT when selling, see Selling properties.

Common examples

This table summarises typical expenses and how they're treated.

Expense	Treatment	Notes
Redecorating between tenants	Revenue	Restores property to rentable condition
Replacing broken boiler (like-for-like)	Revenue	Repair, not improvement
Building an extension	Capital	Adds to the property, track for CGT
Initial furnishing when first let	Capital	First-time purchase, not replacement
Replacing worn sofa (like-for-like)	Revenue	Replacement relief applies
Replacing worn sofa with sofa bed	Revenue (capped)	Can only claim cost of like-for-like sofa
Replacing old fridge with energy-efficient model	Revenue	Reasonable modern equivalent, full cost allowable
Installing central heating (first time)	Capital	Adding new feature, track for CGT
Replacing broken carpets (like-for-like)	Revenue	Replacement relief applies
Upgrading to premium wool carpets	Revenue (capped)	Can only claim cost of like-for-like replacement
Letting agent fees	Revenue	Running cost of business
Legal fees for buying property	Capital	Part of acquisition cost, add to CGT base cost
Repairs mixed with improvements	Split	Apportion between revenue (repairs) and capital (improvements)

HMRC sources and further guidance

HMRC provides detailed guidance on capital and revenue expenses:

Work out your rental income when you let property — HMRC's main guidance including the wholly and exclusively test, repairs vs improvements, and replacement of domestic items relief
Case studies on property rental income — Worked examples of common scenarios including calculating replacement relief
SA105 UK Property Notes — Official tax return guidance including Box 36 (replacement of domestic items)

Allowable expenses — Overview of what you can and can't claim
Which income or expense category should I use? — Complete category-by-category guide
Personal use and mixed expenses — How to handle expenses used partly for business
Capturing expenses — How to record transactions in Provestor
Selling properties — How capital expenses reduce Capital Gains Tax