The nature of buildings is such that it may be necessary to undertake significant repairs, such as the replacement of the roof, or even underpinning the property in the case of subsidence. Where the property is a let property, the landlord will doubtless be keen to secure a deduction for the costs that they incur.

Capital or revenue

In determining whether a deduction can be made in calculating the rental profits, it is necessary to ascertain whether the repair is revenue or capital. This will not always be clear cut.

Generally, a repair will be a revenue item if it restores the condition of the property. However, if the work undertaken significantly enhances the property, it will be classed as improvement expenditure rather than a repair and will be capital in nature. Expenditure on a like-for-like replacement of a roof will be revenue expenditure but a significantly enhanced roof will be capital expenditure.

Common repairs which HMRC accept as being revenue in nature include replacing roof slates, flashing and gutters, exterior decorating and painting, stone cleaning, mending broken windows, doors, furniture and appliances and repointing.

However, where the repair leads to an improvement, consideration must be given as to whether the improvement is significant enough for the expenditure to be capital rather than revenue. An improvement may simply arise because of improvements in the materials available or technological advances. HMRC accept this and accept that a repair is revenue rather than capital where the improvement arises solely as a result of the use of more modern materials. For example, the cost of replacing wooden beams with steel girders is accepted to be a revenue expense.

However, if superior materials are used which result in significant improvement, the cost is capital rather than revenue. Likewise, where there are significant alterations to a property, for example, extending the property rather than simply replacing a wall, the costs will be capital.

Relief mechanism

Under both the cash basis and the accruals basis, a deduction is permitted for revenue expenditure in calculating taxable rental profits.

Under the accruals basis, capital expenditure is not deductible. Depending on the nature of the expenditure, relief is given through the capital allowances system or as a deduction when calculating the gain on disposal.

Under the cash basis, capital expenditure can be deducted in calculating taxable profits unless it is of a type for which such a deduction is expressly prohibited. However, the rules work to deny a deduction for capital expenditure on assets used in ordinary residential buildings or for expenditure on a non-depreciating asset, which

includes a building. Again, relief can be given for improvement expenditure when calculating the capital gain on sale.