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Property Repairs before the First Letting – What is allowable?

There seems to be something of a misconception (both amongst landlords and tax inspectors) about whether the cost of repairs to a newly-acquired buy to let property before it is first let is an allowable expense for tax purposes.

The question turns on whether the expenditure is ‘capital’ or ‘revenue’. Capital expenditure produces an ‘enduring asset’ for the property; revenue expenditure does not.

An example of capital expenditure would be adding a conservatory to the property, or installing central heating where there was none before. These are not allowable revenue expenses, whether they are incurred just after purchasing the property or at any other time.

Essentially, the rules for expenditure on a property before it is first let are the same as those for expenditure at any other time – if it is not capital expenditure, then it is an allowable expense.

Repainting, replacing a broken window, or having the carpets cleaned are all examples of revenue expenditure, and as such can be claimed as expenses even if they are incurred before the property is first let – or if, for example, you have decided to let a property that used to be your home.

There are two tax cases that more or less settled the question of what could be claimed for expenditure on a newly-acquired asset. Both related to the aftermath of war, and both involved large amounts of expenditure.

The purchase of a ship provided an example of expenditure that could not be claimed as a revenue expense. The ship was in very poor condition – in fact it was technically unseaworthy and only a special dispensation allowed the new owners to sail it home to the UK – and then only on condition they sailed it straight to a dry dock where it could be refurbished. The costs or making the ship seaworthy were capital – in fact, they were part of the cost of acquiring the ship itself, because until they were done, the vessel was not fit for use in the trade.

The other case involved cinemas. After the war, most cinemas, though still open to the public, were in a pretty shabby condition. Odeon were buying these cinemas up and redecorating them, and the Inland Revenue (as it was then called) tried to deny them a deduction for the costs, on the basis of the same logic that applied to the rusty old ship referred to above. Odeon won their case, and the crucial point was that the cinemas were fit for use when acquired – indeed most of them were still open. The costs were the costs of routine maintenance that had been neglected during the wartime years.

Even if the property concerned is your first and only buy-to-let, the cost of repairs before you first let it is an allowable expense – though you cannot actually claim it until the tax year in which the letting starts. For example, if you buy the property in February 2013, and spend a month or two doing it up and finding a tenant before letting it on the first of May 2013, you cannot claim the repairs cost in 2012/13, because your business has not yet started. Instead, the costs are treated as if they were incurred in one sum on the first of May, the day the business began.

Points to consider

The two questions you must ask yourself about repairs before the property is first let are:

Was the property fit for letting when I bought it?

Was the expenditure on routine maintenance costs, which perhaps had been neglected by the previous owner?

If the answer to both these questions is “Yes”, the expenses can be claimed against the rent when you start to receive it.

Practical Tip :

Your surveyor’s report will often include an estimate of the rental income that could be derived from the property, and this can be useful evidence that the property was fit for use before you spent the money on repairs. Alternatively, consider taking a few photographs.

James Bailey

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