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Property expenditure & tax - what you need to know

Expenditure you spend on your investment property (whether they be long term lets or holiday lets) will either be deductible against income (revenue expenditure) or an improvement cost for capital (capital expenditure). Consideration needs to be taken as to how you allocate your expenditure.

Why? Lets look at the general principle of accounting, this says that expenditure costs can be deducted against income within a tax year provided those costs are associated with generating that income, but only for that tax year. Examples of this are council tax, utility bills, minor repairs and decor and costs of replacement or renewal (carpets, tiles, taps etc....).

Capital expenditures are costs which are associated with the improvement of the property that will add to the capital value of the property, or provides an improvement which reduces costs over more than one tax year. Examples of this are building an extension/conservatory, changing a bedroom into a bathroom (i.e. major alterations to the original layout), insulation, additional heating, or a change of heating source (say from oil boiler to electrical heating).

Capital expenditure is not deducted against income for tax purposes. These costs are 'asset improvements' and increase the value of the property in your balance sheet. These costs are deductible against any future sale of the property.

However this can be a grey area and in some cases interpretive. There are also exceptions such as replacing old single glazed windows with new double glazed is not considered a capital improvement, as double glazing is accepted as the modern day equivalent when replacing.

Does it matter? YES! Those with property income will undoubtedly want to reduce the profit to tax, therefore will try to push as much of the costs through revenue expenditure and will sometimes include capital expenditure. When a property is sold with a large gain tax payers will want to increase the capital expenditure to deduct for tax.

HMRC are paying particular interest to property income and property disposals at the moment, these matters will be investigated as part of compliance checks.

If you are not sure what is revenue or capital expenditure then get in touch - we can go into more specific detail.

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