Anyone who owns a property will need to carry out repairs and maintenance from time to time. Where the property is let out, the question arises as to whether the landlord can deduct the expense in calculating the profits of their property rental business.
What is a repair?
A distinction is drawn between repairs and improvements. From a tax perspective, repairs are revenue expenditure and improvements are capital expenditure. A repair will essentially keep the property in the same state, while an improvement will enhance it. For example, repointing brickwork would be a repair, whereas building an extension would be an improvement. Other examples of common repairs include:
- painting the exterior;
- interior painting and decorating;
- replacing roof tiles;
- cleaning masonry;
- replacing broken windows;
- mending furniture; and
- damp or rot treatment.
This list is not exhaustive.
As revenue items, repairs are deductible in computing the profits of the property rental business.
Expenditure that enhances the property is capital expenditure rather than revenue. However, where a repair is undertaken with modern materials that give a sense of improvement, this remains a repair rather than an improvement as long as the materials used are broadly equivalent; consequently, the expenditure is revenue expenditure rather than capital and remains deductible. An example of where this may be the case is the replacement of wooden beams that are rotting with steel girders.
Where the expenditure is capital rather than revenue, as would be the case for significant improvements, the extent to which relief may be available depends on basis used to prepare the accounts and on the type of let.
The cash basis is the default basis for unincorporated property businesses where gross rents are less than £150,000. Where the cash basis is used, capital expenditure can be deducted in accordance with the cash basis capital expenditure rules. Where accounts are prepared on the accruals basis, there is no deduction for capital expenditure – only revenue expenditure can be deducted.
Where the let meets the furnished holiday lettings rules or is a commercial let, capital allowances may be available. However, there are no capital allowances for residential lets.
A separate relief applies to the replacement of domestic items.
Partner note: ITTOIA 2005, Pt. 3.