If you incur expenditure on let property, it can be deducted from the rental income if it constitutes a repair but not if it is an improvement. Improvement expenditure is treated as capital expenditure and will usually be deductible on the sale of the property so reducing any capital gains tax liability. However, the sale of the property may not be for some considerable time.
It can sometimes be difficult to determine into which category particular expenditure falls. An example may help. Imagine you replace a fitted kitchen with a similar standard kitchen. This will be treated as a repair and is allowable even though the ‘repairs’ are substantial. However, if you add additional equipment then this counts as an improvement and that element will not be allowed. If the whole kitchen is substantially upgraded then the whole cost is likely to be disallowed. In the past there may have been some relief for ‘notional repairs’ that is the notional cost of the repairs that would otherwise have had to be carried out. This is no longer possible.
The Inland Revenue makes it clear that what may be treated as a repair will change over time to reflect technological improvements. A good example of this is double-glazing. In the past the Inland Revenue took the view that replacing single-glazed windows with double-glazed windows was an improvement and not allowable. Times have changed and building standards have improved so that replacing single-glazed windows with double-glazed equivalents is now treated as a repair and is allowable.
If you are planning major works on your let properties talk to us so that we can review your plans and advise you of the likely tax effect.