Improvement or repair? Know your tax deductions for buy-to-let property

Over the last decade, there have been many changes to the tax rules around buy-to-let properties.

If you are a landlord – or planning to become one – you’ll appreciate that there is often work to do on a rental property, especially when you’re between tenants. But whether you categorise the work as a “repair” or an “improvement” will determine your eligibility for an income tax deduction.

Generally, you cannot claim a revenue tax deduction for the cost of improving your buy-to-let property. Instead, the cost will be deductible when working out your capital gains or loss when you come to sell it.

But the cost of repairing a property is a revenue expense, and will therefore reduce the amount of rental income liable to tax, for the year of expenditure.

So, it’s better to categorise works as repairs, rather than improvements. Is the distinction always clear?

Sometimes not! Adding to a property, for example creating a new room with a loft conversion, will always be an improvement. But the replacement of an entire element of a property, such as a dilapidated garage, may be a repair or improvement.

It doesn’t matter how extensive or expensive the work is either. Your garage roof could be destroyed in a storm and, when you have it replaced it with similar materials to the original, it would still be considered a repair, despite improving the value of your rental property.

Generally, a like-for-like repair or replacement, using equivalent materials and regardless of the scale, would count as a repair.

Any exceptions?

Yes, for when repair work is carried out soon after you purchased your buy-to-let property and the cost of these repairs was reflected in the price you paid.

What about repairing or replacing fixtures and fittings?

Equipment that is fixed to the property, such as the central heating system, is treated in the same way as structure. A like-for-like replacement of the boiler and radiators would count as a repair, thus qualifying for a revenue deduction; if you added an extra radiator, the corresponding portion of the cost would be capital and wouldn’t qualify.

Investing in a buy-to-let property could be a smart decision, especially with house asking prices currently at a record high in the UK. If being a landlord is in your future plans, you’ll need to be up-to-date with all the tax rules around rentals. HMRC offers information online, but here at Figurit we are experts at helping our clients optimise their personal and business finance, so get in touch.

For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.