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Refurbishment Of Rental Properties – What Are The Tax Implications?Written on March 8, 2018 by Kirk Rice LLP

Refurbishment Of Rental Properties – What Are The Tax Implications?
Taxing Times Questions

The Question:

I have three buy to let properties and one of them requires quite substantial refurbishment works. Will I be able to deduct the cost of the refurbishment works against my rental profits?

Kirk Rice LLP answers:

As is often the case with tax the answer, to your question is that it depends!

It is important to analyse the nature of the refurbishment costs to establish whether they will be considered to be a ‘revenue’ cost or a ‘capital’ cost. A revenue expense should be allowable against your rental profits. It is important to note that this will include profits from any of your buy to let properties and not just the property you are undertaking the works on. Capital costs, however, are not an allowable cost against your rental profits, but should be available to offset against any capital gains tax on any future sale of the property.

To establish whether a cost is revenue or capital you need to consider the nature of the cost. If the expense is incurred in restoring an asset by replacing subsidiary parts of the whole, then that will be considered a repair. For example, if the cost is incurred in replacing broken roof tiles then that would be considered to be a repair and therefore revenue cost. If, however the cost is incurred in significantly improving the asset beyond its original condition then that would be considered a capital cost. For example, if a roof is removed in order to build another storey then that is a capital improvement.

Further examples of common repairs that are normally deductible from rental profits are;

  • Painting and decorating
  • Repointing
  • Repairs to broken windows, doors, boilers etc.
  • Replacement of kitchen units or bathroom sanitary ware

With regards to the final two bullet points then some care needs to be taken if there is any substantial improvement in the fixtures that previously existed.

Is the refurbishment cost capital?

Capital expenditure cannot be deducted in computing the profits of a property business.

Examples of capital expenses include:

  • expenditure which adds to or improves the land or property; for example, converting a disused barn to a holiday home,
  • expenditure on a new access road to a property,
  • the cost of a new piece of land next to a property that is let.

Care also needs to be taken with the cost of refurbishing or repairing a property bought in a derelict or run-down state. In these cases the costs incurred in bringing the property into use for the first time will be considered as capital and not revenue. This contrasts with such costs incurred by a landlord on a property owned and previously rented out for many years where they would be treated as revenue. This is not always a black and white situation, and will depend on the specific circumstances, so it will be important to get advice in advance.

Capital gains tax

Capital gains tax is payable on any gains made when a property is sold. Very simply, this will be the difference between the selling price less the original purchase price less purchase and selling costs. These gains can be further reduced by any capital improvements undertaken during the period of ownership. It is therefore important to retain records of the costs incurred to back up the claim made.


 Capital Gains Tax

 Property Investment Tax Aspects

 Property Investment Buy To Let

This post was last updated on 6 March 2018

Any reader interested in discussing the tax implications of the refurbishment of your rental properties can call Graham Jennings on 01344 875 000 in our Ascot office or Hadley Baldock on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk

If you would like to receive Kirk Rice’s Taxing Times Questions regularly by email, simply email info@kirkrice.co.uk stating Taxing Times Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Please note this information is correct on the date published and details may have changed since.