There’s little doubt that, in the last few years, things have got tougher for landlords. One ongoing bugbear stretching back even further back in time has been the definitions that HMRC has for revenue spending and capital spending.

But why is it so important? Burton Beavan investigates.

Revenue expenditure

Costs that you incur on a recurring basis which keep your buy-to-let business functioning are considered to be revenue expenditure. The effects of these purchases are temporary and must be done at regular intervals.

Revenue expenditure are considered costs for tax purchases – you can deduct them to make your profit lower.

Revenue expenditure includes repair costs, maintenance charges, renewal expenses, and repainting costs.

Capital expenditure

Capital expenditure is different and you cannot claim them back as costs to lower your tax bill. You can claim these charges back against Capital Gains Tax when you come to sell the property.

These are normally one-off purchases which help to improve the position of the business overall.

Capital expenditure includes the costs of purchasing a home, delivery charges, installation charges, replacement charges, upgrading charges, and legal charges.

What help are HMRC with this?

HMRC have produced and continue to update their own toolkit to help landlord accountants determine whether something is classed as revenue spending or capital spending. Here’s the current guidance they produce for firms like Burton Beavan.

Please make sure you contact your Burton Beavan accountant to prepare your tax returns so that we can claim all your revenue expenditure back for you.

Case study – is renovating a derelict building so that it can be rented out revenue expenditure or capital expenditure?

A common error that many new to buy-to-let make is considering the costs of making a property habitable as revenue expenditure. If the property is falling to pieces or is derelict, it can be claimed as capital expenditure but it can be difficult to get HMRC to agree to this.

The reasoning behind this is that most mortgage companies will not give you access to funds to buy a derelict or heavily run-down property because they will believe that the property is not suitable for living in.

The most tax-efficient solution here is to use the surveyor’s report. Their report may indicate that the kitchen was unusable or that the bathroom/toilet needed updating. Your best line of attack here is to claim for revenue expenditure on the areas indicated in the surveyor’s report and capital expenditure on the rest of the property.

Luxury or necessity?

HMRC also produce a property income manual which gives more guidance on how to classify expenditure.

For capital expenditure, they give the example of a damaged roof. If your roof previously contained the cheapest tiles, you could replace them with tiles of a similar quality and claim the expense as revenue spending because you have not upgraded the roof as a whole – you have just replaced it with something of similar quality.

However, if, instead of using the cheapest tiles, you decided to use very expensive tiles and perhaps fit a couple of rooflights at the same time, this would be an improvement and therefore be classed as capital spending.

Similarly, HMRC consider the situation where an old kitchen is ripped out and replaced with a similar and modern equivalent. This repair would be considered “allowable” as revenue expenditure and could be deducted from your profit.

However, if, in their words, you replaced the kitchen with “expensive customised items using high quality materials, the whole expenditure would be capital”.

It’s not always clear cut however. If you fitted additional kitchen cabinets, added extra equipment, or somehow increased shelving space as part of your “like-for-like” renovation, HMRC would claim that “this element is a capital addition and not allowable (applying whatever apportionment basis is reasonable on the facts).”

Improving technology is a necessity, in some cases

Double-glazing has been installed as standard on new homes for at least three decades. For many, double-glazed windows would be considered a necessity because of its insulating and anti-theft properties.

For many years, HMRC would consider the replacement of single or secondary glazing as a luxury. This has changed, as noted in their property income manual – “in the past, we took the view that replacing single-glazed windows with double-glazed windows was an improvement and therefore capital expenditure. But times have changed. Building standards have improved and the types of replacement windows available from retailers has changed…Generally, if the replacement of a part of the “entirety” is like-for-like or the nearest modern equivalent, we accept the expenditure is allowable revenue expenditure.”

Be careful however. In the 1970s, sun lounges (which often looked on the inside like a wooden-panelled steam sauna) were big. Many still exist in the UK but if you were to argue to HMRC that replacing an aging but functional sunroom with a state-of-the-art conservatory was revenue expenditure, you may have an argument on your hands.

Talk to Burton Beavan

For all things capital and revenue and for any matters relating to buy-to-let, contact Burton Beavan on 01606 333 900 or email us at hello@burtonbeavan.co.uk.