Finance & Tax Helpful Tips

Call of the Week: Is this a Capital or Revenue Cost?

Call of the week
Michael Wright
Written by Michael Wright

Today’s call of the week is answered by Michael Wright, from RLA partner organisation, the tax advisory service  RITA4Rent.

Question: We purchased a buy-to-let property at a very good price, however, at a consequence of it being in poor condition.  One major expense was that the whole property had to be rewired as the electrics, and therefore the whole property was deemed unsafe.  Is this an allowable expense when I complete my tax return?

Michael says:

First of all, it would be helpful to review your circumstances in depth, just to be sure we have a clear picture of your position.  However, there is a key word you have included here, and that is “unsafe.”  This would suggest that the property was not fit for rental.  It is important to note that pre-letting costs incurred in bringing a purchased property into a habitable state are usually classed as capital costs as opposed to revenue costs.

To be clear, revenue costs are claimable when calculating income tax, whereas capital costs are claimable when calculating capital gains tax.

It is a very complex area when determining whether a cost is of a capital or a revenue nature, and there are plenty of tax cases on this subject.

For this particular query, there are two cases which are especially relevant, and explore the treatments when a property is, or is not, fit for letting.  The first case was Law Shipping Co Ltd vs CIR in 1923, and the second was Odeon Associated Theatres Ltd vs Jones in 1971.  These are of course very lengthy cases, but briefly, in the Odeon cinemas case, the cinema could operate without needing to carry out repairs.  Therefore, it was strictly fit for purpose and the repairs could be classified as revenue costs.  Whereas in the shipping case, costs had to be incurred to ensure the ship was fit for purpose.  Due to this, it was deemed that the costs should be treated as capital expenses.

If you need any tax advice please don’t hesitate to contact RITA4Rent.

About the author

Michael Wright

Michael Wright

Michael Wright is Director of RITA4Rent Limited, specialists in property tax. With clients ranging from 1 property starters, to large portfolio landlords, Michael and his team are dedicated to working with landlords to order their taxes in the most efficient manner. As well as being partners of Residential Landlords Association and the Property Tribes, Michael and RITA4Rent have also been featured in numerous media outlets and contributed to several articles, such as in the Guardian, the Evening Standard, the Daily Mail, Letting Agent Today, MoneyWise, Accountancy Age, Simply Business, Northwood, Endsleigh Insurance and Aldermore Bank.

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