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Repairing the fixed assets of a business will generally be a tax-allowable business expense, but improving an asset will not.
Repairs are revenue expenses, and allowable against income, but improvements are capital expenditure, and not allowable against income (although they may be deducted from the capital gain on disposal for CGT purposes).
The problems arise when we are at the borderline between a repair and an improvement. Perhaps the easiest way to consider the fundamental principles is to take something like a laptop computer, used in a tax consultancy business:
- If the laptop breaks and has to be completely replaced, then that is a capital item, not a repair. I have replaced the asset in its entirety, and that is always a capital cost.
As an aside, I might be able to claim Capital Allowances for the cost of certain assets like a laptop or other office equipment, but that is a separate tax relief, and the cost of replacing the laptop would not be allowed as a normal deduction for tax purposes in the business accounts themselves (note that the rules under the Cash Basis differ).
- Let’s say instead that the problem is the graphics card and the laptop is fine once that component is replaced. This counts as a repair to the asset – the laptop – and would be allowable against business profits.
- Finally, let’s say that instead of simply replacing the graphics card on a like-for-like basis, I decide to get a significantly superior replacement graphics card. That is an improvement to the overall asset, and will again be a capital cost that will not be allowed as a deduction in the business accounts.
The key point to bear in mind for BTL properties is that in most cases, where the thing being repaired or replaced is attached to the property, the “asset” in question is the overall property. Replacing a kitchen is like replacing a component (e.g., a graphics card) in a laptop, so will be a capital improvement only if the new kitchen is superior to the quality of the kitchen it replaced.
Case Study: Repairs, Improvements, and “The Entirety”
Bill and Ben are both BTL landlords. Bill owns a two-bedroom house he lets out, and so does Ben. In order not to complicate this case study, they have both kindly agreed not to insure their properties against storm damage!
One day, a severe storm destroys the roofs of both properties.
Bill pays to have the roof replaced with a similar one – this costs him £8,000.
Ben takes the opportunity to have the loft of the house converted into a new flat, raising the height of the walls by one metre. The cost of this is £30,000.
Bill is allowed a deduction for the whole of the £8,000. He has replaced the damaged roof with a similar one, and this is a repair – the roof is not a distinct asset but part of the let property. Ben gets no deduction at all for his £30,000. This is because the conversion of the loft is clearly an improvement, and the replacement roof is part of that improvement. He may, however, get a deduction in his CGT calculation, if and when the property is sold or otherwise disposed of.
This may seem unfair, but the facts in Ben’s case are based on one of the leading cases on the subject of repairs (Thomas Wilson (Keighly) Ltd v Emerson, in 1960). Note that in some cases, it may be possible to break projects down into distinct repair and capital elements, so that the cost attributable to the repair component may be claimed as a business cost for tax purposes.
A good example might be where I replace my kitchen, which originally had (say) 10 units, with a similar-quality kitchen but that has 12 units: the cost of acquiring and installing the 2 extra units would be a capital improvement, while the 10 units would be a “like-for-like repair” and allowable against rental income.
Note that:
- The laptop used in the illustrative example about the tax consultancy business would be a typical fixed asset of a property renovation business, but
- Repairing a property as per the subsequent case study would usually not fall within the ambit of Capital v Revenue, because a property developer would normally be working on a property to sell it for a trading profit – they would not be at risk of improving a capital asset of the business (unlike a property investment/rental business), because the asset they’re working on is essentially trading stock
“Notional Repairs”
There used to be a concession, whereby in a case like Ben’s a claim would have been accepted for “notional repairs” – that is, for the cost of repairs that were no longer necessary because of the improvements. Under this concession, Ben could have been given a deduction for the £8,000 he would otherwise have had to spend on repairing the roof.
Caution: This concession was withdrawn from April 2001, and “notional repairs” can no longer be claimed in such cases.
Modern Materials
Sometimes it is almost impossible, or impractical, to repair a property by replacing “like with like” as Bill did. Perhaps the best example is double glazing. When double-glazing was first introduced to the market, it was considered to be better than standard single-glazed units in terms of heat and noise insulation. But double-glazing is now considered the “norm”, and it is often more difficult / expensive to specify single-glazed units.
If your BTL property has old fashioned single-glazed windows, and these need to be replaced, it is likely to be easier and cheaper to install modern double glazing rather than to have replacement single-glazed windows made. In a case like this, where the “improvement” is a result of modern materials and techniques, HMRC will usually accept that the expenditure is on a repair (allowable), not an improvement.
Repairing Newly-Acquired Property
If you buy a BTL property that is in a dilapidated state, then it is possible that the cost of putting it right may be regarded as capital expenditure (in effect, part of the cost of buying the property itself) and so not be allowed as an expense against the rent.
This is likely to be the case if:
- The property was not in a fit state to be let when you bought it, so the improvements were necessary to make it possible to use it in your business, or
- The price of the property was significantly reduced as a result of its poor condition
In other cases, however, repairs before the first letting are an allowable expense – note that there is a common misconception that they are not allowable.
