Understanding the relationship between Refurbishing Properties and Tax
In todays property market the overall living standard your property requires has never been so closely regulated and requires a much higher standard than ever before. As a result, many investors find it's beneficial to completely refurbish the property, often before the first let, and this initial outlay of capital can equate to big money.
Investors need to understand the relationship between refurbishing properties and tax consequences so they can factor this into their financial plans.
Property Repairs and Tax
Revenue costs
Routine maintenance includes standard replacements and repairs within your property. Examples of this are replacing fittings in a bathroom or kitchen, replacing roof titles and keeping guttering clear. These maintenance costs are classed as "revenue costs" and will be subtracted from revenue (income) to arrive at a rental profit.
Capital Costs
Where you're a property company or an indivudal owner, most investors desire costs or repairs to be classed as 'revenue costs' becuase it qualifies you for an immediate tax deduction.
This includes expenses involved with the land and building itself, plus any refurbishments that isn't classed as a simple maintenance repair. You will only qualify for Tax relief for your Capital Costs when the property is sold. For example, converting a garage to create another letting room is classed as "Capital Costs", even if the garage roof needed to be repaired anyway. Capital works to letting properties are usually only finically beneficial to a landlord if they are trying to add a additional room to their property, for example converting a loft into another bedroom suitable for let.
Whether you're a property company or an individual owner, most investors desire costs of repairs to be classed as "revenue costs" because it qualifies you for an immediate tax deduction. Tax relief for Capital Costs could come years later if you have no current plans to sell the property.
Refurbishment Before Letting
Are you currently planning to implement a complete refurbishment on a property before a tenant has even moved in? Don't fall into the trap of believing this refurbishment will be classed as Capital Costs as this is often not the case. Only costs involved with bringing a derelict or severely run-down property up to an acceptable standard for letting fall under the Capital Costs bracket. It's essential that before you invest in a properties refurbishment you have a clear understanding of if it will be claimable as Revenue Costs so you can implement it into your financial tax strategy.
Modern Replacements
If you carry out a replacement of a fitting that is the equivalent to what was there before, there is a good chance that HMRC will accept that it is a repair and you may wish to swap the fitting with a modern substitute (for example, replacing a single glazed window with double-glazing.) Where such "modern equivalent" replacements are used, even if there is some improvement, the costs are still classed as Revenue. The "improvement" element would need to be extremely significant, for any costs to be considered as Capital - for example, replacing an old garage with a new brick-built extension.
Demonstrating Refurbishment Works as Repairs
Broadly speaking, if your property was in a "lettable condition" before expenditure commenced then it is classed as Revenue. Otherwise it is probable to fall under the Capital bracket.
Supported evidence
Your property is likely to have been surveyed by a lender before any point of sale and this report will indicate if the building was in a condition that qualified it as a potential letting property. If this was the case it will really support any argument that costs incurred after a purchase were general repairs thus Revenue costs. Other useful evidence is videos and photographs of the property before any refurbishment takes place. You should also make sure that any invoices of work carried out come with a descriptive breakdown of what took place.
Retention
If a surveyor places any sort of 'retention' report on the mortgage offer this indicates the relationship of Capital against Revenue for the refurbishment work that needs to be carried out. Surveyors will often describedetails of any fittings that need updatingand this may be classed as Capital, however the remaining costs can still be classed as Revenue.Splitting the spend between Capital and Revenue, to find the Revenue costs to be included in the rental accounts can result in a higher revenue deduction than you may expect.Understanding the relationship between Capital and Revenue in this instance can have a huge impact on your tax liabilities so getting to grips with it before your refurbishment is extremely important. Contact us today if you are unsure and need to discuss this further.
Provisions
If an investor has actually incurred the liability of works that has still not been completed you may still be able to include the cost of this refurbishment work into your accounts and end of year tax return. A good example is work that is still in process and something you have not yet received an invoice for.
Contact Elite financial Accounting Today!
Refurbishing property and tax liabilities need comprehensive strategic tax planning to ensure the maximum amount of costs can be treated as Revenue, qualifying you for immediate tax reductions. Here at Elite Financial Accounting we specialise in Property Tax Planning and have the knowledge and expertise to unsure the most beneficial tax procedures are put in place before and after you begin a property refurbishment.