Tax question re rental income
Discussion
We've rented out a flat for a few years and always used the 10% wear and tear allowance.
This year we had to refurbish the flat between tenants so had a few large bills. We had to repaint throughout, replace all carpets as the existing ones were threadbare, and replace all windows as the original wood-framed ones had rotted.
Is it acceptable to claim all these costs in full as repairs/renewals ?
If so, the carpet was ordered in one tax year 09/10, laid in 10/11 and paid for (interest free) in 10/11 and 11/12. Where does the allowance belong?
Similar issue with the windows, ordered in 09/10, installed in 10/11 and paid for (with some interest) in 10/11 and 11/12. In this case is the interest claimable too?
Thanks in advance for any advice.
This year we had to refurbish the flat between tenants so had a few large bills. We had to repaint throughout, replace all carpets as the existing ones were threadbare, and replace all windows as the original wood-framed ones had rotted.
Is it acceptable to claim all these costs in full as repairs/renewals ?
If so, the carpet was ordered in one tax year 09/10, laid in 10/11 and paid for (interest free) in 10/11 and 11/12. Where does the allowance belong?
Similar issue with the windows, ordered in 09/10, installed in 10/11 and paid for (with some interest) in 10/11 and 11/12. In this case is the interest claimable too?
Thanks in advance for any advice.
10% Wear and Tear Allowance is only applicable if the flat is a fully furnished let. The 10% claim is in lieu of actual replacement costs for furniture and moveable fittings. Ordinary on-going repairs and maintenance costs are still allowed in addition to the 10% allowance.
Capital costs on the property are NEVER allowed in any circumstances as deductions against rentral income. Instead, these are treated as "Enhancement Costs". These are added to the property's original base cost and are brought into the equation in the Capital Gains Tax computation which will arise if and when the property is eventually sold or disposed of.
Capital costs on the property are NEVER allowed in any circumstances as deductions against rentral income. Instead, these are treated as "Enhancement Costs". These are added to the property's original base cost and are brought into the equation in the Capital Gains Tax computation which will arise if and when the property is eventually sold or disposed of.
Thanks Eric.
Flat was let as furnished until Feb 2010 when tenant moved out, empty until July during which time we refurbished then let to a new tenant as unfurnished.
Are you saying that the window costs are capital so we can't use but the carpet and decorating costs can be offset against rent?
I understand that we can't use the 10% now it's unfurnished.
How does the order/install/invoice/pay in different tax years work? Which are the significant dates?
Flat was let as furnished until Feb 2010 when tenant moved out, empty until July during which time we refurbished then let to a new tenant as unfurnished.
Are you saying that the window costs are capital so we can't use but the carpet and decorating costs can be offset against rent?
I understand that we can't use the 10% now it's unfurnished.
How does the order/install/invoice/pay in different tax years work? Which are the significant dates?
.
Eric Mc said:
Capital costs on the property are NEVER allowed in any circumstances as deductions against rental income.
One man's 'capital costs' could well be another man's essential repair/maintenance work. Simple and typical examples:
Tenant phones to complain about faulty boiler. Gasfitter attends and advises against uneconomic and temporary repair and recommends replacement. Essential remedial work or improvement?
Tenant reports defective wall socket. Electrician attends and advises that wiring in property is aging and becoming dangerous and advises rewire. Essential maintenance or improvement?
Tenant reports leaking and draughty windows which are causing health problems. Joiner advises against repairworks and recommends replacement with modern window system. Essential remedial work or improvement?
Whilst HMRC has almost no chance arguing the above is enhancement/capital expenditure, HMRC's argument is stronger (though far from cast iron) if the works are done between tenancies. HMRC's argument is strongest if the works are done prior to the first tenancy commencing.
Edited by groan on Saturday 29th January 18:28
Interesting this one - as I've been given some different advice and also found some stuff no the HMRC website.
This led me to believe that there were a small number of items which were 100% allowable as they were part of the building/structure.....those being only:
- Windows/Door
- Kitchen
- Bathrooms
That were in a state of disrepair that the rental income would not continue if not replaced/fixed.....
I replaced a kitchen in one of the rentals this year (old one was builders original and 16 years old) and plan to claim this as a cost against income as it was improving the house, but replacing something which was not longer fit for purpose......we'll see how I get on I guess.....
Similarly in the next tax the windows will need replacing and I've read (on HMRC website) that replacing wood (which I have now) with UPvC is allowable as a deduction as it is essential to the rental of the house...
This led me to believe that there were a small number of items which were 100% allowable as they were part of the building/structure.....those being only:
- Windows/Door
- Kitchen
- Bathrooms
That were in a state of disrepair that the rental income would not continue if not replaced/fixed.....
I replaced a kitchen in one of the rentals this year (old one was builders original and 16 years old) and plan to claim this as a cost against income as it was improving the house, but replacing something which was not longer fit for purpose......we'll see how I get on I guess.....
Similarly in the next tax the windows will need replacing and I've read (on HMRC website) that replacing wood (which I have now) with UPvC is allowable as a deduction as it is essential to the rental of the house...
Replacements ARE allowable as long as the replacements are a direct replacement. Replacing ordinary windows with ordinary windows is allowed. Replacing ordinary windows with double glazing would not be allowed.
The same goes for kitchens, bathrooms etc. Like for like replacements are allowed. Improvement type costs are not.
BUT, as I said earlier, IMPROVEMENT type costs WILL be allowed as a deduction when computing the capital gains as and when the property is sold or disposed of.
Some capital type costs MAY be allowable against rental income if the costs are incurred due tro regulations - such as installing fire doors or fire escapes in a house of multiple occupation.
This whole area can be very tricky and the distinction between capital and revenue type costs is not always absolutely clear cut.
The same goes for kitchens, bathrooms etc. Like for like replacements are allowed. Improvement type costs are not.
BUT, as I said earlier, IMPROVEMENT type costs WILL be allowed as a deduction when computing the capital gains as and when the property is sold or disposed of.
Some capital type costs MAY be allowable against rental income if the costs are incurred due tro regulations - such as installing fire doors or fire escapes in a house of multiple occupation.
This whole area can be very tricky and the distinction between capital and revenue type costs is not always absolutely clear cut.
Thunderace said:
Thanks Eric.
Flat was let as furnished until Feb 2010 when tenant moved out, empty until July during which time we refurbished then let to a new tenant as unfurnished.
Are you saying that the window costs are capital so we can't use but the carpet and decorating costs can be offset against rent?
I understand that we can't use the 10% now it's unfurnished.
How does the order/install/invoice/pay in different tax years work? Which are the significant dates?
Up to Feb 2010 you could claim 10% wear & tear allowance, there after unfurnished flat you would/could claim total cost of any furnishings, carpets, curtains etc. etc.Flat was let as furnished until Feb 2010 when tenant moved out, empty until July during which time we refurbished then let to a new tenant as unfurnished.
Are you saying that the window costs are capital so we can't use but the carpet and decorating costs can be offset against rent?
I understand that we can't use the 10% now it's unfurnished.
How does the order/install/invoice/pay in different tax years work? Which are the significant dates?
Replacing wooden windows with uPVC double glazed windowswould be an improvement, so costs could be deducted/claimed in the event of the sale of the property, in order to reduce any Capital Gains tax liability.
As others have stated, there is a grey area between repair and improvement, certainly if you were to receive an Invoice stating repair and make good, together with sound proof all windows, then the same is tax deductable against the gross rentable income.
Wings said:
Replacing wooden windows with uPVC double glazed windows would be an improvement....
Not necessarily. But it could be a cheaper alternative to crafted sash-and-case. If the windows are causing problems and are not repairable other than by replacement then that's that. It's a part of the essential maintenance of the property. Arguing that it was an expenditure deliberately aimed at improving rather than maintaining the property would be pointless.
Like for like is the key.
uPVC ouble glazing for wooden double gl;azing counts as like for like - doesn't really matter if the window frames are of a different material.
A gas cooker for an electric cooker counts as like for like
A fully fitted kitchen for an old style set of separate units would PROBABLY be looked on as an imnprovement.
As I said earlier, the definitions are not always clear-cut and, as I also said, there are many tax cases surounding interpretation as to what counts as "replacement" rather than "improvement".
uPVC ouble glazing for wooden double gl;azing counts as like for like - doesn't really matter if the window frames are of a different material.
A gas cooker for an electric cooker counts as like for like
A fully fitted kitchen for an old style set of separate units would PROBABLY be looked on as an imnprovement.
As I said earlier, the definitions are not always clear-cut and, as I also said, there are many tax cases surounding interpretation as to what counts as "replacement" rather than "improvement".
groan said:
Not necessarily. But it could be a cheaper alternative to crafted sash-and-case.
If the windows are causing problems and are not repairable other than by replacement then that's that. It's a part of the essential maintenance of the property. Arguing that it was an expenditure deliberately aimed at improving rather than maintaining the property would be pointless.
“the glass is half filled, half empty” we are both right, so I agree in part to the contents of your posting. For me it is about the person who presents a set of accounts, being prepared to support, argue, defend those same set of accounts.If the windows are causing problems and are not repairable other than by replacement then that's that. It's a part of the essential maintenance of the property. Arguing that it was an expenditure deliberately aimed at improving rather than maintaining the property would be pointless.
It is for me about landlords deciding if they personally need the investment/rental income/taxation, or if they can either reduce or totally eliminate the same, by either a partner being responsible for that income and using their personal tax allowance, or adopting a long term capital gains approach, by carrying out each accounting year a full repair maintenance program.
For the OP it is not about answering one, two or three accounting questions, it is about having a tax, financial long term strategy, and this can really only be mapped out by both talking and employing an accountant like Eric.
Wings said:
“the glass is half filled, half empty” we are both right, so I agree in part to the contents of your posting. For me it is about the person who presents a set of accounts, being prepared to support, argue, defend those same set of accounts.
It is for me about landlords deciding if they personally need the investment/rental income/taxation, or if they can either reduce or totally eliminate the same, by either a partner being responsible for that income and using their personal tax allowance, or adopting a long term capital gains approach, by carrying out each accounting year a full repair maintenance program.
For the OP it is not about answering one, two or three accounting questions, it is about having a tax, financial long term strategy, and this can really only be mapped out by both talking and employing an accountant like Eric.
Other than the facilitation of portfolio expansion via refinancing (a game largely abandoned at the mo), landlords have only a passing interest in capital gain. And any real arguments which develop in relation to tax aren't dealt with by accountants, they're dealt with by lawyers assuming HMRC are in the mood to add some cost to the taxpayers' burden. It is for me about landlords deciding if they personally need the investment/rental income/taxation, or if they can either reduce or totally eliminate the same, by either a partner being responsible for that income and using their personal tax allowance, or adopting a long term capital gains approach, by carrying out each accounting year a full repair maintenance program.
For the OP it is not about answering one, two or three accounting questions, it is about having a tax, financial long term strategy, and this can really only be mapped out by both talking and employing an accountant like Eric.
The one at issue here is very simple. Is the job a repair or an improvement? Fortunately for landlords, a repair may BE an improvement. But that doesn't make it any less of a repair. Timing and circumstances are very important. Take the double glazing issue. Buying a flat to let it, and double glazing it before putting it on the market would be very hard to argue as a repair. Double glazing it between tenancies would be hard-ish. But double glazing it following a (written) complaint from a tenant backed up by a medical note mentioning draughts/condensation etc would be easy, as would be replacing windows on the back of a formal requirement for an essential repairs/repairs notice issued by the local council. Equally easy would be a note from a tenant either withholding rent or giving notice of quit on the basis of problems with windows. Those are windows in serious need of repair as they are causing damage to the letting of the property as opposed to damaging its value.
Windows were done between tenancies but mainly due to not knowing quite how bad they were until we had full and unrestricted access to the flat.
Flat was rented privately to the same tenant for approx 5 years, she was a friend who had parted from her husband and lived there with a teenage daughter. Their downsizing meant that they had loads of junk and piles of boxes around the flat. As tenants they were great, being friends a lot of stuff was done on trust, we charged a lower rent than we might have as we didn't have the pressure to maintain the place to such a high standard and there were no management fees. They didn't have the same expectations as a more distant tenant.
We couldn't actually get in to inspect fully, would have liked to have repainted and recarpetted sooner but didn't have the access for either. She was happy with this.
We got free access when she moved out to live with her new guy. First time we tried to open a bedroom window it nearly fell out! Tenant had known about how delapidated it was but not told us as she didn't want to upset us! Draft had been covered up by stuffing gaps with cloth.
Flat is close to the sea and 20 year old hardwood frames (which probably weren't the best when new) had rotted. We replaced wood-framed DG with UPVC DG.
Carpet was threadbare and looked like it had been grazed by sheep in places.
Since renovating and changing to unfurnished monthly rent has gone up by approx 50%.
Flat was rented privately to the same tenant for approx 5 years, she was a friend who had parted from her husband and lived there with a teenage daughter. Their downsizing meant that they had loads of junk and piles of boxes around the flat. As tenants they were great, being friends a lot of stuff was done on trust, we charged a lower rent than we might have as we didn't have the pressure to maintain the place to such a high standard and there were no management fees. They didn't have the same expectations as a more distant tenant.
We couldn't actually get in to inspect fully, would have liked to have repainted and recarpetted sooner but didn't have the access for either. She was happy with this.
We got free access when she moved out to live with her new guy. First time we tried to open a bedroom window it nearly fell out! Tenant had known about how delapidated it was but not told us as she didn't want to upset us! Draft had been covered up by stuffing gaps with cloth.
Flat is close to the sea and 20 year old hardwood frames (which probably weren't the best when new) had rotted. We replaced wood-framed DG with UPVC DG.
Carpet was threadbare and looked like it had been grazed by sheep in places.
Since renovating and changing to unfurnished monthly rent has gone up by approx 50%.
Thunderace said:
Windows were done between tenancies but mainly due to not knowing quite how bad they were until we had full and unrestricted access to the flat.
Flat was rented privately to the same tenant for approx 5 years, she was a friend who had parted from her husband and lived there with a teenage daughter. Their downsizing meant that they had loads of junk and piles of boxes around the flat. As tenants they were great, being friends a lot of stuff was done on trust, we charged a lower rent than we might have as we didn't have the pressure to maintain the place to such a high standard and there were no management fees. They didn't have the same expectations as a more distant tenant.
We couldn't actually get in to inspect fully, would have liked to have repainted and recarpetted sooner but didn't have the access for either. She was happy with this.
We got free access when she moved out to live with her new guy. First time we tried to open a bedroom window it nearly fell out! Tenant had known about how delapidated it was but not told us as she didn't want to upset us! Draft had been covered up by stuffing gaps with cloth.
Flat is close to the sea and 20 year old hardwood frames (which probably weren't the best when new) had rotted. We replaced wood-framed DG with UPVC DG.
Carpet was threadbare and looked like it had been grazed by sheep in places.
Since renovating and changing to unfurnished monthly rent has gone up by approx 50%.
So to conclude, and i am speaking only as another landlord, and not as an accountant. if your intentions are to reduce your investment income tax, then you claim 10% wear & tear allowance, (10% of gross rental payments) up to when the premises were finished, thereafter 100% of costs for carpets, curtains, soft furnishings etc. As for windows you will be claiming for "like for like", so a repair and therefore 100% of the costs for the same.Flat was rented privately to the same tenant for approx 5 years, she was a friend who had parted from her husband and lived there with a teenage daughter. Their downsizing meant that they had loads of junk and piles of boxes around the flat. As tenants they were great, being friends a lot of stuff was done on trust, we charged a lower rent than we might have as we didn't have the pressure to maintain the place to such a high standard and there were no management fees. They didn't have the same expectations as a more distant tenant.
We couldn't actually get in to inspect fully, would have liked to have repainted and recarpetted sooner but didn't have the access for either. She was happy with this.
We got free access when she moved out to live with her new guy. First time we tried to open a bedroom window it nearly fell out! Tenant had known about how delapidated it was but not told us as she didn't want to upset us! Draft had been covered up by stuffing gaps with cloth.
Flat is close to the sea and 20 year old hardwood frames (which probably weren't the best when new) had rotted. We replaced wood-framed DG with UPVC DG.
Carpet was threadbare and looked like it had been grazed by sheep in places.
Since renovating and changing to unfurnished monthly rent has gone up by approx 50%.
Whilst you are loosing the 10% wear & tear allowance, there are considerable advantages in letting an unfurnished property against one furnished, repairs, health & safety etc. etc.
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