When properties are purchased, one of the first thing that is planned is refurbishment.
These refurbishing done may have different types of tax implications depending on the work done.
The refurbishment could either have capital or revenue nature.
Difference between capital works and revenue refurbishment.
The difference between capital and revenue refurbishment relies mostly on the type of work done.
If the improvement has been carried out on the property would increase the value of the property, a capital refurbishment has been carried out on the property.
However when the type of refurbishing that is carried on the property would only result in carrying out repairs, then the nature of the expense is revenue.
The reason is that these repairs are most likely going to be required more often to maintain the property.
When these improvements are very small, they may count as incidental to a repair.
Tax relief referred to as capital allowances are available for expenditure on certain industrial and agricultural buildings.
Plant or machinery within buildings may qualify at time.
There are no capital allowances for the cost or depreciation of residential property, but there are special rules covering the replacement of domestic items.
What happens when some of the work done has both elements(Capital and revenue)?
It’s possible to have both elements in the refurbishment.
When this happens, the expenditure may be apportioned on a reasonable basis to provide an estimate that is attributable to each element.
For example, the contractor giving an invoice splitting the cost of the work done.
That is why it is essential to identify the work done and separate the work according to nature.
The tax consequence of capital and revenue refurbishment.
The revenue refurbishment or repair can be deducted from the rental income to reduce the taxable rental profit.
However, the capital works done would be added to the cost of the property and the relief is deducted when the property is sold in future.
Other times when repairs could be treated as capital expenditure.
As explained above, improvement in properties are mostly capital expenditure whilst the repairs are treated as revenue expenditure.
However when a property is acquired in a dilapidated state, repairs are carried out immediately that there is a change of ownership combined with one or more additional factors, the repairs could be treated as a capital expenditure.
The reason is that the property acquired wasn’t in a fit state for use in the rental business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
Another reason is that the price paid for the property would most likely be lower than the usual market price due to the repairs needed.
Conclusion on refurbishing properties.
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When computing your taxable rental profit, you need to ensure the appropriate expenditure is deducted.
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