- Accounts submitted to HMRC & Companies House
Buy to let property allowable costs – Revenue or Capital?
Costs incurred in a business can be categorised in one of two ways,
– Revenue costs (that can be used to reduce your income tax bill).
– Capital costs (that can be used when you sell the property and can be set against the amount of gain made to reduce your capital gains tax bill).
As HMRC’s website states, refurbishment costs are allowed provided the property is in a lettable condition. To quote HMRC’s website, “A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or couldn’t continue to be let without repairs being made shortly after acquisition.”
A customer may incur expenses for a rental business before that business starts. If so, they may be able to claim a deduction for them once the letting begins (ITTOIA05/S57 or CTA09/S61). Relief is only due under these special rules where the expenditure:
Qualifying pre-commencement expenditure is treated as incurred on the day you start the rental business. This is deducted, together with the other allowable expenses, from the total receipts of the business for that year.
– is incurred within seven years before the date the rental business is started, and
– is not otherwise allowable as a deduction for tax purposes, and
– would have been allowed as a deduction if it had been incurred after the rental business started.
Refurbishment costs will be considered capital if you can not get a buy to let mortgage. This is an excellent signal to suggest if the property is dilapidated or in a lettable state. If the property is lettable, then HMRC will see like for like repairs/replacement as allowable to be offset against your taxable income. If the property does not have a buy to let mortgage, then this tells HMRC that the property is dilapidated and that refurbishment costs are capital.
Allowable refurbishment costs to reduce your property profits and tax
There are three types of expenses that are allowed to be offset against your property profits. These allowable refurbishment costs will reduce the tax that you pay to HMRC. Simply put, the three Rs are:
– Replacement (kitchens, bathrooms and furniture)
– Repairs (roof tiles, garden fence, brickwork)
– Renewals (replastering, repainting)
Let us take a property that you have purchased. It is a property that has not been renovated for many years. You know the types of property that have:
– The beautiful woodchip wallpaper
– The stunning salmon bathroom suite
– Furniture that looks as though it was leased from a museum. Yes, people still watch black and white TVs