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Most expenditure incurred by a landlord will be allowable at sometime whether as capital (where it is deductible in the capital gains tax computation on disposal) or as a business (revenue) expense against rental profits.
Landlord allowable revenue expenses
To be allowable as a revenue expense such expenditure must follow the same rules as for any trading expense claim namely that there is no enduring advantage or benefit and be incurred “wholly and exclusively” for the purposes of the rental business.
Landlords who purchase a property may incur substantial costs before they can let. However, just because the expenditure is deemed necessary does not make it automatically allowable as an expense. Where required to be of a higher standard to be legal then the cost is deemed to be an improvement on the original and therefore a capital expense rather than a replacement (e.g. a fire alarm already in place for domestic use needing to be of a higher standard for letting would be a capital improvement).
Rewiring is usually classified as capital. When such work is undertaken other repair works are usually incurred at the same time (e.g. changing fuse box, light switches etc). In this case the electrician should be asked to split the costs between those necessary to make the property legal (capital) and other repair works (income).
Repair work may include an element of improvement. This will be in point where building materials have improved such that it would be impractical to replace “like with like”. In such circumstances HMRC generally accepts that the expenditure is an income expense providing that the improvement element arises only due to the upgrading; any improvement to performance or capacity being small.
Wholly and exclusively rule for landlords
Having satisfied the “wholly and exclusively” rule and subject to the taxpayer having no other let property, the commencement of a letting business follows the usual business rules. Therefore allowable pre-letting expenditure is deemed to have been incurred on the first day that rent is earned (which need not necessarily be the date that the income is received). If the landlord has other let property then dates are irrelevant, an allowable expense being deductible against rental income received by the business as a whole.
When deciding whether an expense is revenue or capital the question to ask is: could the property be let in its current state without the costs being incurred? If so, then the expenditure is a business expense; if not, then it is capital.
