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Claiming 100% refurbishment costs against your property taxable income

August 13, 2013

Posted by Simon Misiewicz on 10th August 2013

Are you looking to buy an investment property in the future?

Are you going to be refurbishing the property?

I wrote an article some time ago entitled “HMRC 2013 changes to capital allowances – how does it affect you?” which outlined the fact that people with investment properties cannot claim capital allowances. This is largely unfair given that investors are investing more than the cost of the building, especially if they are HMOs and are furnished.

Well, I was not happy that my client and I would suffer because of these rules. I then went away in a darkened corner to quote a Tony Robins phrase “Find the opportunity”. So I did and I have a great solution for people that are looking to buy and refurbish an investment property.

HMRC has stated that refurbishment works cannot be offset against annual profits and will be deemed a capital cost if the following is true (2):

  • The property was purchased at a significant discounted price because of the poor condition.
  • The property could not be let out because of the condition it is in until refurbished.

You may think reading this that no refurbishment works is allowable but then HMRC states (2)
“In the case of residential accommodation we accept that the ‘entirety’ will normally be the house or the block of flats that is let. So if your roof is damaged and you replace the damaged area, your expenditure is allowable.

“Even if the repairs are substantial, that does not of itself make them capital for tax purposes, provided the character of the asset remains unchanged. For example, if a fitted kitchen is refurbished, the type of work carried out might include the stripping out and replacement of base units, wall units, sink etc., re-tiling, work top replacement, repairs to floor coverings and associated re-plastering and re-wiring. Provided the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure is allowable. If at the same time additional cabinets are fitted, increasing the storage space, or extra equipment is installed, then this element is a capital addition and not allowable (applying whatever apportionment basis is reasonable on the facts).”

Read this as you please but my interpretation is simple. If you are buying a property at a discounted price, which can still be let, and you choose to refurbish the property then the costs are allowable as long as you are not upgrading the property. I am unsure how HMRC will be able to validate whether an upgrade has been made on a kitchen.

My suggestion to you is this – buy properties at below market value, as you would normally and refurbish the property and charge the costs against your income. The two bullets state that the property could not be let because of the condition or the property was in such bad condition that that it could not be let out. I am unsure how HMRC or anyone else could argue these points.

As I said in a previous article though that you cannot claim certain costs against your income tax for furnished properties, examples being furniture and flooring but will have to use the 10% wear and tear allowance. (4).

HMRC do blur things don’t they? Read the following passage (2):

“An example is double-glazing. In the past we took the view that replacing single-glazed windows with double-glazed windows was an improvement and therefore capital expenditure. But times have changed. Building standards have improved and the types of replacement windows available from retailers have changed. We now accept that replacing single-glazed windows by double-glazed equivalents counts as allowable expenditure on repairs.”

So, the windows are better quality are not considered to be an upgrade!!

Additionally you can claim costs against your tax if you are creating energy efficiencies in your property. Examples of these are (3):

  • Loft insulation
  • Cavity wall insulation
  • Solid wall insulation
  • Draught proofing
  • Hot water system insulation
  • Floor insulation

You can only claim a maximum of £1,500 per dwelling that has energy efficiencies, at the time of writing anyway.

In summary you can claim against your property taxable income:

  • 100% of your refurbishment costs (if replacing like for like assets)
  • Claim £1,500 on energy efficacy costs
  • 10% wear and tear on furnished properties

If you wanted to play it extra safe then I would suggest that you ask the seller’s of the property to itemise the following on the sales documents:

  • Value of the land & building
  • Value of the kitchen
  • Value of Bathrooms
  • Value of white goods (if supplied as a rental)

This can then be used as evidence that there were assets in the property and the fact that you are replacing / repairing those assets, which means they are justified in being offset against your tax. I stress that you should not put in a kitchen costing £3,000, if the value in the sale documents only shows £1,000 as this will certainly be seen as an improvement and will be considered a capital expense.

We can help you save £10,000’s pounds by simply reviewing the investment property and associated refurbishment. We provide accountancy services from 97p per day. Is it not worth paying just a little money to ensure that you make the most of your tax allowances?

Call us today or miss out on the tax savings that most accountants, whom are not property tax specialists, don’t know anything about.

For more information please contact us on 0115 946 1991 or click here to email

References:

(1) http://www.hmrc.gov.uk/manuals/pimmanual/PIM2020.htm

(2) http://www.hmrc.gov.uk/manuals/pimmanual/PIM2072.htm

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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk