Clarification regarding property expenditure please

Sarah-Lou

Evening!

I have a property client who has had bought a property and started renting it out in July 2011. Before they let it they had to replace two windows (rotten) and after the tenants moved in the boiler broke down and was uneconomical to replace.

I have read the property pages on HMRC plus various books but not sure whether this is capital expenditure and can have capital allowances or whether it is revenue.

Firstly I thought capital expenditure and therefore capital allowances but the more I read I thought revenue expenditure and now i'm totally confused!

Any advice gratefully received. Thank you.

Sarah-Lou

peaman

If the replacement windows/boiler were similar to those replaced, it will be revenue expenditure.

If the replacements were significantly superior to the originals (i.e. they could increase the value of the property), it will be capital expenditure.

It can be argued that any new windows/boiler could increase the value of the property, so it is a bit of a grey area. In grey areas I always go for the best option for the client, so treat as revenue expenditure.

Sarah-Lou

*phew* I'd gone with revenue. Boiler was replaced like for like (more environmentally friendly) and the rotten windows were replaced with double glazing but so could be argued as superior but of course more eco friendly so usually allowable.

Thank you for clarifying :001_smile:

reader

Sarah-Lou wrote: »

I have a property client who has had bought a property and started renting it out in July 2011. Before they let it they had to replace two windows (rotten) and after the tenants moved in the boiler broke down and was uneconomical to replace.
Sarah-Lou

The replacement of the windows in order to bring the property into a usable state sounds like an improvement to me (i.e. improving the property from being unusable to usable) and therefore capital.

The boiler sounds like a straight forward repair and you should be able to claim this in addition to any wear and tear allowance available (as wear and tear allowance is typically characterised as a deduction for the cost of moveable items rather than fixed items).

peaman

Yes, the it could be argued that the windows are capital, see pim 2120...

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.

So, if you can argue that the property could have been let with the 2 rotten windows, you can claim revenue expenditure. I doubt that the property would have been substantially reduced because of 2 windows.

As I said, it is a bit of a grey area, if you believe you have a reasonable argument, go for revenue! Presumably if HMRC ever question it (unlikely) they will have to take the clients word for it as the rotten windows will be long gone.

reader

Precise Tax wrote: »

As I said, it is a bit of a grey area, if you believe you have a reasonable argument, go for revenue! Presumably if HMRC ever question it (unlikely) they will have to take the clients word for it as the rotten windows will be long gone.

The rotten windows will be long gone but the dates on the invoices and agreements won't!

I wish tax was precise!

peaman

Yes, but the client could just say that the windows weren't that bad, but they are fussy and wanted them replaced. HMRC would most likely accept this as they couldn't prove otherwise.

Tax isn't always precise, it is often grey, which makes it more fun for us accountants!

Gem7321

Revenue. Technology has changed and double-glazed windows are now standard so can be deemed as replacing like-with-like.

reader wrote: »

The boiler sounds like a straight forward repair and you should be able to claim this in addition to any wear and tear allowance available (as wear and tear allowance is typically characterised as a deduction for the cost of moveable items rather than fixed items).

There was no mention of whether the property was furnished or not so wear and tear allowance may not be available.

Monsoon

Any remedial work done before the property first let out, in order to bring it up to a lettable condition, is capital. Therefore it's this that suggests the windows are capital. The fact that single glazed have been 'upgraded' to double glazed is irrelevant - as Gem says, this is just bringing it up to the normal modern standard. Only you/ the client knows if the property could have been let out with rotten windows

Boiler is revenue repairs.