Will I get tax relief on repairing my newly acquired let property?
I’m often asked this question by clients who are looking for a simple “yes” in response. However, that isn’t always the case so “it depends” is usually my initial reply.
Property purchased at a substantially reduced price
The Carlisle floods in December 2015 have been followed in recent weeks by a number of properties coming to market at auction at a substantially reduced price reflecting their condition. Typically these are properties where initial stripping out work has been undertaken to the downstairs of the property with the upstairs remaining in relatively good condition.
Such properties are attracting greater interest from buy-to-let landlords than owner-occupiers despite the limitations of the Flood Re scheme which doesn’t afford any assistance to landlords. Auctions taking place in March 2016 witnessed strong activity as buyers looked to beat the deadline for the 3% SDLT increase on second homes but the interest appears to have continued especially for buyers looking to acquire what they see as a ‘bargain’.
So, what is a repair in this scenario?
If you buy a property in a derelict or run down state and the price you have paid for it was subsequently reduced then the money spent putting the property into a fit state to be let may be treated as an improvement rather than a repair. The difference being that an improvement will only obtain tax relief when you come to sell the property rather than being deducted against the income received in the first year of letting.
For a flood–damaged house it could be that the majority of monies spent on the ground floor are treated as improvements whereas decorating costs and general repairs to the upstairs of the property may be treated as repairs, i.e. different parts of the house may give rise to different treatments.
Property purchased at normal market value
Not all landlords buy homes in such a dilapidated state as outlined above. Thought still needs to be given to how to treat the costs incurred though. As a general rule, if a property is capable of being let upon purchase and the buyer has decided to accelerate the maintenance program there is nothing to prevent the monies spent being treated as repairs and offset against income in the first year if they are indeed repairs and not improvements.
Unintentional improvements whereby new materials are used which are broadly equivalent to old materials will normally remain to be treated as a repair. For example, replacing single-glazed windows with a like for like double-glazed equivalent will be a repair.
Where a significant improvement has been made, for example structural repairs, this expenditure will not be deductible immediately. Instead, the costs should be recorded and will be available for offset against proceeds of any future sale.
So what should I do if I’m unsure?
As a landlord you will be submitting your Tax Return on a Self Assessed basis. This means that HM Revenue & Customs do not check it for accuracy but could select your return to make enquiries. If this happens and mistakes are identified you may be liable to additional tax, interest and penalties.
A schedule of monies incurred along with supporting invoices is recommended at the very least. It is also advisable to take before and after photos of all areas where work is undertaken. This will prove invaluable is supporting your argument should it come to that.
If you would like assistance in preparing your rental accounts, tax return or have any general queries regarding your property portfolio do not hesitate to contact me.
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