Follow these case studies to find out
- The red house that is habitable, although it will require updating before it is let out
- The blue house that is in a much more dilapidated state and will need essential work before it may be let out
The general principals
- The use of modern techniques/materials, which provide an element of improvement, is not necessarily fatal to a revenue deduction against property income.
- When comparing the quality of items with what they replace, the key test is the quality of the item when originally installed, not immediately before replacement.
- Where there is both maintenance and improvement and the two can be separately identified, the maintenance element can be claimed.
- Just because a cost is essential to letting does not make it automatically allowable against property income, but may imply the opposite.
- Just because an expense is incurred prior to first let, does not make it automatically capital.
The Red House
The property price is not materially less than it would have been if the property were fully modernised and is therefore an appropriate market rate.
Before the first lets the property, will need to:
Replace the Bathroom
The bathroom is vastly improved on its previous condition but the test is ‘quality of new fittings versus quality of old when first installed’ and as such if the originals are comparable, and the cost of the items, materials and installation are all deductible.
Since there wasn’t previously a separate shower unit, this would be an improvement in this case, and its cost would not be allowable. Whilst the cost of the shower fittings is probably separately identified on his plumber’s bill, the labour may not be analysed so a reasonable apportionment of the labour costs would be in order.
Install a High-quality kitchen
In fine detail, there may be elements which are ‘like for like’ such as re-painting the ceiling, or replacing wall sockets, and their attendant materials and labour costs could perhaps be claimed as revenue. Practically speaking, however, it should be realised that little tax relief is available.
Replace Floor coverings and re-decorate
Carpeting, although old, was originally of a high quality throughout and normal quality carpets are used to replace them. There should be tax relief on his expenditure and, provided you don’t commission Michelangelo to re-paint the walls, there should be no issues with claiming a deduction for re-decorating either.
The Blue House
An old house valued at a good price. Unfortunately there are a few issues:
One of the walls needs underpinning
The collapsing foundations are a serious threat to the integrity of the building, and the main reason why the current owner has had difficulty in selling at the normal market rate.
The work is a capital improvement as the asset is substantively impaired and the cost will not be allowed against rental profits (note that if the subsidence had appeared sometime after purchase and had not therefore featured prominently at acquisition, then it could be an allowable repair).
The roof is leaking
A couple of ridge tiles are missing, but the roof is essentially fine. Although it would make the property very difficult to let if ignored, the problem is easily treatable and the damage so far is basically cosmetic; the price is not affected and the expense is tax allowable.
The damp is progressively worsening, but that is to be expected in a property of such age.
If the surveyor had found the property to be rife with damp, then the cost of making good might be capital, but the cost could be allowed as part of the property’s routine maintenance cycle if not serious at the point of purchase.
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