Disallowing rental repairs

Monsoon
Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
I have a client with a property portfolio and their previous accountant disallowed a large bill for repairs to a property, citing it as capital.

I've checked the bill and would class it all as revenue expenses. The repairs were essential as the property was not in a fit state to be let, and it's all like-for-like stuff.

I'm guessing the previous accountant assumed this was a new purchase and thus treated the repairs as capital. However the property has been owned and let before, and a tenant caused the damage.

I can put in a claim for relief but just want to run it past you to check I've not missed anything.

Comments

  • T.C.
    T.C. Registered, Tutor Posts: 1,448
    Just depends on the type of expenditure really, as I am sure you know. If it is a repair then revenue expense, but if it is an improvement, then capital. I would go along with your instinct if it works for the accounts.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Thanks TC, that's what I'm thinking, except the previous accountant (decent firm) clearly disallowed it for a reason.
  • T.C.
    T.C. Registered, Tutor Posts: 1,448
    Maybe because the accounts did not "need" the extra expenses and they thought it more appropriate to capitalise??? Just an idea.
  • Newbie
    Newbie Registered Posts: 229 ? ? ?
    PIM2020

    Repairs etc after a property is acquired

    Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the taxpayer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

    A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
    The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the taxpayer makes the repairs just after they acquire the asset.
    The taxpayer makes an agreement that commits them to reinstate the property to a good state of repair. For example, Fred is granted a 21-year lease of a property in a poor state of repair by his landlord that he, in turn, sublets. When Fred’s landlord grants him the lease Fred agrees that he will refurbish the property. Fred’s expenditure on making good will be capital expenditure and not allowable. But Fred’s landlord may be chargeable on the value of the work under the premiums rules ( PIM1200 onwards) and Fred may qualify for some relief (see PIM2300 onwards). See below if payments for dilapidations are made to the landlord at the end of the lease.

    It isn’t necessary for all these factors to be present for the expenditure to be capital. The underlying principle is that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure.

    Where the taxpayer is granted a lease of a property in good repair, the expenses they incur in keeping it in that state will normally be deductible. This generally includes a payment they make to their landlord at the end of their lease on account of repairs which were due but which they had not made. These over-due repairs are called ‘dilapidations’.
  • PGM
    PGM Registered Posts: 1,954
    Monsoon wrote: »
    disallowed a large bill for repairs

    would class it all as revenue expenses

    The repairs were essential as the property was not in a fit state to be let, and it's all like-for-like stuff.

    tenant caused the damage.

    All the points you state would make it obviously revenue costs.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Thanks both.

    Newbie, that's what I'd read which makes me think it's revenue. I'll have to detail the reasons for an overpayment relief claim, so it will be up to HMRC to decide at any rate.
  • JJH1969
    JJH1969 Registered Posts: 110 ? ? ?
    Initial repairs are all treated as capital if they are required to bring the property into a lettable state (Law Shipping Co Ltd v CIR, 1923)

    The following are treated as capital ' a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

    A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    JJH1969 wrote: »
    Initial repairs are all treated as capital if they are required to bring the property into a lettable state (Law Shipping Co Ltd v CIR, 1923)

    The following are treated as capital ' a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

    A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
    Thanks Juliet.

    That is the only example I can think of where repairs wouldn't be allowable.

    As this is not the case in my client's situation - in that the repairs were a few years after the house was being let - I consider them revenue.
  • Dean
    Dean Registered Posts: 646
    Monsoon wrote: »
    The repairs were essential as the property was not in a fit state to be let

    This is why the previous accountants have disallowed the expenses as revenue.

    Did the previous accountants provide you with a schedule for capital expenses? Presumably, it appears on there? When the disposal of the property comes they will get relieved then.

    Regards

    Dean
  • PGM
    PGM Registered Posts: 1,954
    Dean wrote: »
    This is why the previous accountants have disallowed the expenses as revenue.

    Did the previous accountants provide you with a schedule for capital expenses? Presumably, it appears on there? When the disposal of the property comes they will get relieved then.

    Regards

    Dean

    I read that as damage done by previous tenant, as it was "like for like stuff"

    Would need more details to be sure, but it reads as revenue to me.
  • Dean
    Dean Registered Posts: 646
    PGM wrote: »
    I read that as damage done by previous tenant, as it was "like for like stuff"

    Would need more details to be sure, but it reads as revenue to me.

    Agreed.

    With the phrase being used I think that's why they didn't allow it. Not saying it's right or wrong..

    Regards

    Dean
  • PGM
    PGM Registered Posts: 1,954
    Dean wrote: »
    Agreed.

    With the phrase being used I think that's why they didn't allow it. Not saying it's right or wrong..

    Regards

    Dean

    Yeah very true!
  • Monsoon
    Monsoon FMAAT, AAT Licensed Accountant Posts: 4,071 ? ? ?
    Dean wrote: »
    Agreed.

    With the phrase being used I think that's why they didn't allow it. Not saying it's right or wrong..

    Regards

    Dean

    Agreed, I think that's why they disallowed it - as I would have done had it been immediately after the property was bought and under the same conditions.

    However, as the property had already been let out, and these repairs were in between tenants, I believe it is allowable.

    The client wants then to be revenue and a claim for overpayment relief as they are several £'000 of expenses.
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