For tax purposes the cost of a repair is normally deemed revenue expenditure but the cost of replacing an asset or making a significant improvement, with some minor exceptions, is capital expenditure.
Quote: “Read my lips, no new taxes” George Bush 1924 - campaign pledge on taxation, New York Times, August 1988.
Expenditure on your property falls into two categories. It is either to buy an asset that is expected to last some time or to maintain such an asset.
If your investment property is residential property then the “assets” include the house itself and the furnishings and equipment inside it.
These “assets” are split into two categories. Imagine that you can take the building, turn it upside down and shake it. What falls out is “furniture, and furnishings”. For the avoidance of doubt this category includes carpets, curtains and white goods and does NOT include the fitted kitchen, fitted bathroom and central heating system which are all part of the fabric of the building.
If you let a property unfurnished it will have little or nothing in the way of furniture and furnishings. If you let it fully furnished it will have everything a tenant needs to live there except for minor and personal items.
A partly furnished house does not qualify as a furnished letting for this purpose and the Wear and Tear Allowance is not available. However the Renewals Basis remains available regardless of the level of furnishing.
If you repair any item of furniture or furnishings then you may claim the cost of this in full as a deduction from rental income under the “Maintenance” heading. If you do not need to replace an item it is unlikely that it will be in the same condition in five years as it was when it was new and nor will it be worth as much. In other words, some of the value of the item (e.g. a carpet) is used up every year.
You have two choices as to the tax relief you get for this diminution in value that occurs over several years. You may either claim the Wear and Tear Allowance or you may claim the cost of replacement on what is called the Renewals Basis.
In neither case may you claim for the original cost. You may not claim both the Wear and Tear Allowance and the renewals basis. In some circumstances you may switch from one to the other – but not too frequently!
The advantage of the Renewals Basis is that it gives the landlord a deduction from rental income every time he replaces items of furniture or furnishings. This is particularly helpful if the landlord has particularly high renewal costs that would not be covered by the Wear and Tear Allowance.
The allowance on the Renewals Basis is the cost of replacing an item that has reached the end of it’s useful life with another similar item. It is generally accepted that direct replacement may not be possible, for example because of technological advances.
However if the replacement item is materially different having considerable improvements then the improvement element is not allowable. This may be a particular problem if the item that is replaced did have a direct replacement without enhancements, and the landlord has chosen an item with enhancements.
For example, if the property had just a sofa that has broken and it is replaced by a three-piece suite, there is clearly part of the new expenditure that is replacement (sofa for sofa) and part that is improvement. You may have some difficulty if you treat the whole of the cost of the suite as a “Renewal”.
The HMRC have generally accepted that replacement windows are not improvements when say singled glazed windows with rotted wooden frames are replaced with new plastic double glazed units, as replacing as originals would not be practical and could in fact be more expensive. In fact this does sometimes arise where a building is in a conservation area or is listed, in which case window replacement must be "as original" and may need to be custom made.
Page content supplied by: Maurice Patry FCA of www.landlordstax.co.uk
