The tax system for property income can seem like a confusing maze, filled with treacherous pitfalls and harsh restrictions on tax relief. As a landlord, understanding how to maximise claims for repairs expenditure can significantly impact your tax bills and potentially improve your rental yield or property sale price.
In his session, Property Income Carl Bayley looked at the topic of repairs and maintenance and the key considerations and strategies that can be used to optimise your claims.
Understanding Repairs vs Improvements:
The first step is to distinguish between repairs and improvements. Repairs restore the property to its previous condition during the same ownership, while improvements add something new that wasn't present before. Repairs provide immediate tax relief for income tax purposes, while capital improvements are added to the cost for capital gains purposes.
The Like-for-Like Principle:
One of the critical aspects of claiming repairs expenditure is understanding the like-for-like principle. This principle allows landlords to replace an old item with its nearest modern equivalent and claim it as a repair. For example, replacing single glazing with double glazing or a battery-powered smoke alarm with a hardwired one can be claimed as repairs because they essentially perform the same function.
Nearest Modern Equivalent:
HMRC accepts the nearest modern equivalents as like-for-like replacements. This means that if due to changes in fashion or technology, it's more efficient to use the nearest modern equivalent, it's accepted as a like-for-like replacement. This opens up much more scope to do what a layperson regards as an improvement and claim it as a repair. While replacing items with their modern equivalents is generally considered a repair, upgrading to luxury items is seen as an improvement. For instance, installing a marble bath with gold taps would be considered an improvement unless what they're replacing was an old marble bath with gold taps.
Energy Efficiency Upgrades:
With the government proposing higher energy efficiency standards for rental properties, landlords may need to spend money on making their properties more energy-efficient. These expenditures could potentially be claimed as nearest modern equivalent replacements, thus deductible as repairs.
In some cases, such as redecorating, the expenditure might be a bit of both repair and improvement. In these situations, costs can be apportioned across other costs in a just and reasonable manner.
Remember, the tax law surrounding repairs and improvements is continually evolving, and it's always worth having an open mind and checking out the latest HMRC manuals. As a landlord, understanding these nuances can help you maximise your claims for repairs expenditure, ultimately benefiting your bottom line.
To watch the full session, click here. In the session, Carl Bayley cover the above as well as the following topics:
- The impact of restrictions on interest relief for residential landlords
- How to maximise claims for repairs expenditure
- When can landlords claim capital allowances?
- Forgotten expenses: what else should landlords be claiming?
- The benefits of joint ownership
- The cash basis: friend or foe?
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.