Tax implications on Property improvements verses property repairs

Tax implications on Property improvements verses property repairs

First let’s start by understanding the definition between both property improvements and repairs.

Repairs or ‘revenue’ expenditure is what is incurred merely to preserve or maintain an asset. Improvements, or ‘capital cost’ is the process of enhancing an assets value. Here are a couple of examples:

Example 1.

If you were to carry out work on something that is attached to the property, the asset you are working on is the entire property. So, replacing the kitchen with something of similar quality will be a repair cost, just like replacing the roof or re-plastering. But upgrading the kitchen with units and appliances of superior quality to the originals would count as improving the property overall, so would be a capital cost.

Example 2.

Painting or decorating would normally be considered to be on the revenue account – essentially ‘repairs’ (although painting, or otherwise decorating a new loft extension this would be considered as part of the capital cost of that extension, rather than a repair).

But what does this mean in Tax terms?

Craig (a higher rate taxpayer) buys a new FHL property for £400,000 and after 6 months decides that, due to the condition of walls etc, it could do with re-plastering and repainting throughout, at a cost of £40,000. These are repairs to the property, and Craig can claim them against his rental profits of £100,000. As Craig’s taxable profits will be reduced from £100,000 to £60,000, This will save Craig £40,000 @ 45% = £18,000 in 2020/21.

Craig after a good 1st year also decides that he needs to upgrade the kitchen & bathroom so that it will appeal to a more discerning guest and replaces them both with decidedly more upmarket items at a cost of £50,000. This is an improvement cost. Now Craig will be able to save in two elements firstly now (assuming that he has not already claimed Capital Allowances) and when the property is sold, in 2025 he will also make a saving on his Capital Gains Tax bill.

Capital Allowances:

Looking at Craig’s purchase consideration of £400k he will likely, for an FHL be able to claim back around 25-35% of that purchase consideration giving him a yield at the bottom end of £100k in Capital Allowances.

Now looking at his improvement spend of £50,000 to determine this figure we will also need to look at the number of items that qualify as embedded items of plant (these are qualifying items that are screwed, glued or imbedded to the structure of the building). Let’s suggest that 45% of these items qualify to the value of £50,000, this would yield Craig £22,500 in Capital Allowances.

In total, Craig now has £122,500 in Capital Allowances. Which given he is a 45% taxpayer will give in a direct tax saving of £55,125 likely meaning he will not pay tax on that FHL property for around 3 years.

Capital Gains Tax

If tax rates remain the same as they are now, Craig will reduce his capital gain by £50,000; assuming he is still a 45% taxpayer this cost will reduce his 2025 CGT bill by £50,000 @ 28% = £14,000.  

Concluding: - for an investment expenditure of £490K Craig has managed to make these direct cash savings on his tax bill:

Purchase and improvements (CA’s): £55,125.00

Repairs: £18,000.00

Improvements (CGT): £14,000.00

Total tax saving of £87,125.00

This means if Craig paid 10% deposit on a 90% LTV mortgage of £400K = £40K, Craig could now in a position to take on another 1 or even 2 FHL’s.

Want to find out if this type of outcome could apply to you?

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