Offsetting Expenses

[nickbearne]

Hi, I am shortly going to be renting out my 1 bed house which I currently live in. I want to do some work to it, ie new carpets and flooring etc. Even though the property is not let and may not be for a few months until I find a new property, am I able to offset these expenses against my rental income once it is let? I'm a little unsure on this as I will still be living in the property for while and will have some use of the new flooring myself.

Thanks

Nick

[Preston]

Hi

There are one or two real experts on tax matters who contribute to this site, so hopefully they will pick up your message and give you a proper answer.

For what its worth, I think the answer to your question is no, you cant offset repairs costs incurred before the business commences against future rental income. However, depending upon exactly what work you are proposing to do, you may be able to "capitalise" the cost and so offset interest charges on any monies borrowed in order to carry out the work. Or, if you are letting the property as furnished, you will be able to offset 10% of your rental income against depreciation of the furniture provided.

Good luck

Preston

[plym77]

Hi Nick

Essentially what Preston says is right, the key questions are a) is the property going to be furnished? and is it in a lettable state prior to the work?

If it is in a lettable state then there is arguement that some of the costs incurred in painting/decorating etc could be claimed under repairs and maintenance, but it is important to distiguish between this, and capital improvement. This is a very shady area and would take an age to give you the ins and outs on here so I think it is best that you read the Property Income Manual (link below) and then if you need any specific clarification, let me know.

If it is going to be furnished you have to weigh up whether you would be better to use the replacements basis (RB) or wear and tear (again, details should be detailed in the PIM). Most people are better on the Wear and Tear Allowance if a property is furnished rather than renewals over the long term (and on W&T basis floor coverings could not be claimed) as most landlords do not replace the items they put in on a regular basis (you cannot claim the first purchase of an item , only the replacement on the RB).

Have a look at the Promperty Income Manual, and if you have any further queries let me know - http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

In the meantime, I hope this helps

Regards

Sherena

[Gee]

Hi Sherena

Thanks also from myself, you have the rare ability to explain taxation matters simply.

Cheers

Gee

[nickbearne]

Hi Sheena, thanks very much for clarifying this for me.

Regards

Nick

[MarkJ]

Sherena

I am in a very simlar position - just about to purchase a property that is an 'OK' state (tired rather than delapidated). I'm doing a full refurb (new kitchen, bath, carpets and full re-decorate.

At what point is a property 'in a lettable state' (to use your quote) and thus the work I'm doing could be argued to be W&T and at what point does the work I'm doing become 'capital expenditure'.

Thanks

(As a PS are legal costs, and surveys etc tax deductable on a BTL purchase?)

[plym77]

In answer to your question, there is no straight answer and is down to personal judgement I am afraid and I have to say that it is one area that is difficult to define. I generally talk with a client about what was there, what they did, why they did it etc to get a feel for it and discuss the options.

Ask the questions a) could I live there (sensibly and comfortably, even though the units may be tired) and will I be increasing the value of the property

I always explain to clients that if it was liveable then there is argument that it is repairs and maintenance, replacing old with new modern equivalent - but it also depends on how much you are spending and the impact of the value of the property. If you are replacing an old kitchen unit with a basic new one then this could be fine, but putting in top of the range units will be improvement as this would improve the value.

Like I say it is a difficult one and you and your adviser will have to use your judgement. What I would say normally is if there is arguement that it is repairs/maintenance and not improvement then that is probably your best option (assuming you will have profits to offset), but bear in mind that this is an area that HMRC would attack if you were enquired so be prepared to fight your corner with evidence (the more the better - perhaps take pictures beforehand? detail what needs doing, why etc) and that if HMRC disallow expenses you coud end up paying interest on underpaid tax.

And do remember that if it is a struggle to justify a revenue expense, it would ordinarily be a capital improvement and thus allowable against the future sale of the property.

As far as legal fees on purchase, these will be set against the future sale for CGT purposes.

I hope this helps

Sherena

[Troughton]

In answer to your question, there is no straight answer and is down to personal judgement I am afraid and I have to say that it is one area that is difficult to define. I generally talk with a client about what was there, what they did, why they did it etc to get a feel for it and discuss the options.

Ask the questions a) could I live there (sensibly and comfortably, even though the units may be tired) and will I be increasing the value of the property

I always explain to clients that if it was liveable then there is argument that it is repairs and maintenance, replacing old with new modern equivalent - but it also depends on how much you are spending and the impact of the value of the property. If you are replacing an old kitchen unit with a basic new one then this could be fine, but putting in top of the range units will be improvement as this would improve the value.

Like I say it is a difficult one and you and your adviser will have to use your judgement. What I would say normally is if there is arguement that it is repairs/maintenance and not improvement then that is probably your best option (assuming you will have profits to offset), but bear in mind that this is an area that HMRC would attack if you were enquired so be prepared to fight your corner with evidence (the more the better - perhaps take pictures beforehand? detail what needs doing, why etc) and that if HMRC disallow expenses you coud end up paying interest on underpaid tax.

And do remember that if it is a struggle to justify a revenue expense, it would ordinarily be a capital improvement and thus allowable against the future sale of the property.

As far as legal fees on purchase, these will be set against the future sale for CGT purposes.

I hope this helps

Sherena

[Troughton]

Hi Sherena

I have a related question. I have just refurbished a house, which we moved into this year. Since then, our circumstances have changed and we are now seeking to rent the house. The roof needs replacing, is this something that we could claim back on expenses and if so, would it be better to do the roof after tenants have moved in or prior to that?

Many thanks,

Helen