What are the tax implications of rental refurbishments?

Many people with money to invest like the security of putting it into property. It’s no surprise, then, that there’s big demand for properties to rent out. With interest rates still low, rental property can offer an income that exceeds the level you’d get from putting money in a savings account.

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One in 10 people in the UK now owns more than one property, so it’s clearly popular – but what are the tax implications of refurbishing a property in order to rent it out?

Capital versus revenue

The general rule is that capital expenditure will not be allowed against rental profits (although it may be offset against capital gains later when you come to sell) but revenue costs will be allowed. So what’s the difference?

Revenue expense is what you incur by restoring a property to its original condition. This might be replacing a broken window or repointing brickwork, for example. It could also be fitting new bathroom or kitchen units. Capital expense, on the other hand, involves making the property significantly better. This might be building an extension, creating a new access road, or converting a property from another use – turning a shop or barn into a house, for example.

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Grey areas

When it gets complicated is at times when you have bought a run down or derelict property. If you’re making it habitable for the first time in many years, then the cost of refurbishment is likely to be treated as capital. However, if it’s been previously rented out but has not had repairs or updates for some time, then it could be revenue. It’s best to consult an expert in these circumstances. Either way, remember that before letting a property it’s important to record all the details using property inventory software from https://inventorybase.co.uk/ or similar.

Capital gains are only incurred when the property is sold. This is the difference between the price you bought the property for and the price you sell it for – minus costs. The gains can be offset against the cost of any capital improvements to the property, meaning you will pay less tax. It’s therefore vital that you keep hold of records and invoices for any work that you have had carried out, as you’ll need these as evidence to back any claims.

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