Tax laws: Allowable expenses Vs Capital expenditure
A common misconception among buy-to-let landlords is that the cost of repairs to a newly-purchased property cannot be claimed.
This is not always the case.
In fact, such repairs are an allowable expense as long as certain conditions are met. The key distinction to be made is between capital expenditure and routine maintenance.
Capital expenditure is the cost of acquiring the property and making it fit for use as a let. Routine maintenance is any expenditure beyond that, even if it is extensive.
The acid test is this: Was the property fit to let before the repairs were carried out? If yes, then the repairs are an allowable expense against the rent once the property is let.
Interestingly, the law surrounding this issue derives from two unexpected sources: a cinema and a ship.
Odeon Cinemas claimed the cost of repairs to various cinemas they had refurbished after the war. However, the Court felt that the refurbishments made were not to make the cinema useable, but were actually routine maintenance works. They were also satisfied that the price Odeon paid for the cinemas was not significantly lower because of the condition they were in.
Therefore the Odeon cinemas repairs were judged to be allowable expenses.
The second case involving the ship was not favourable to the ship owners. Upon purchase, the ship was not deemed seaworthy. When the ship was repaired and the ship-owners went to court, the Court pointed out that the ship was clearly not fit for use, and the repairs were necessary before it could be used or sold.
Therefore the cost of the repairs was capital expenditure, included as part of the cost of the purchase of the ship, and subsequently not allowable as an expense.
The distinction between capital expenditure and repairs applies to any work carried out on a property, at any stage in its ownership, and there is nothing special about work carried out before the first letting. Expenditure on normal maintenance is an allowable expense.
So before you buy a property to let, think about this – is it a cinema, or a ship? If the property is like a cinema, that just needs a quick clean, then that’s fine. But if it’s a ship, can you afford to make it seaworthy?