Keeping your rental properties spick and span means carrying out regular maintenance and repairs. But what are the rules around claiming these repair expenses against tax?

People often get confused by the HM Revenue & Customs rules around deduction of expenses for repairs and maintenance of a rental property. The good news is that we’ve got a simple summary to help you understand (and stick to) the correct rules.

Understanding your expenditure on a rental property

The money you spend (expenditure) on a rental property can be either ‘capital’ or ‘revenue’ in nature. So what does that difference mean?

• Capital expenditure is added to the purchase price of the property, and taken into account when calculating capital gains when the property is disposed of. This could include the costs of building the property, making structural improvements to the building or adding a conservatory or garage etc.
  
  
• Revenue expenditure is normally deductible from ongoing profits and, as a result, will reduce your income tax liability. These costs could include replacing faulty lead pipes with plastic pipes or replacing damaged single-glazed windows with double-glazed ones.
  
  

Expenditure on enhancements will generally be capital in nature, and any improvements that purely involve a change in materials would be revenue expenditure. That’s your basic rule of thumb when working out whether repairs fall under capital or revenue expenditure.

How does a repair qualify as tax-deductible revenue expenditure?

If you purchase a property, any expenditure needed to make it fit for occupation is likely to be capital. So, if you buy a property with a badly-leaking roof, which impacts on the purchase price, then replacing the roof will be a capital expense. On the other hand, if the roof was damaged in a storm after the property was purchased, the replacement would be a revenue expense.

Broadly speaking, for costs in connection with a newly-acquired property to be treated as revenue expenditure, the expenditure would need to meet three tests:

• It must be a genuine repair that would be deductible if it was incurred in an existing rental property
• It was not necessary to render the property inhabitable
• The price paid for the property must not have been deflated because of the work to be carried out.
  
  

Sometimes, it may be necessary to split costs between capital and revenue elements. In these cases, any split must be fair and reasonable. It’s usually helpful to retain any documentary evidence that supports the allocation and your reasoning behind the split.

Where domestic items such as ovens or dishwashers are replaced, the cost is treated as revenue expenditure as long as it is on a like-for-like basis. Minor improvements – e.g. replacing a faulty 6-settings dishwasher with an 8-settings one – can be ignored. But replacing a £1,200 gas stove with a £12,000 AGA range would definitely be treated as a capital expense.

Talk to us about claiming the right rental expenses

It’s essential to use the correct treatment for expenditure on your rental properties. If costs can be treated as revenue then any tax relief can be claimed immediately. But capital expenditure is a slower process and can only be taken into account when the property is disposed of.

We’ll help you get the correct tax treatment of costs you incur, whether it’s costs on a recently-acquired property, or ongoing costs from your existing rental properties.