RLA : RPI : Repairs countdown

News from the Residential Property Investor, the bi-monthly magazine for RLA members

other artilces from the December 2000 / January 2001 issue

Repairs countdown - December 2000 / January 2001

A valuable tax concession for residential landlords will be removed as from 6 April next. Until then it is still possible to claim a tax deduction for the repair element of any property improvement projects, says Gerry Mulryan, of Macclesfield chartered accountants Mulryan & Co.

If you make improvements to your rented properties, the cost will be treated, for tax purposes, as an addition to you investment. This means that the Inland Revenue will not allow you to deduct the cost from the rental income when working out your tax.

But any building work is hardly that clear. All 'improvements' are likely to include an element of repairs.

As the law stands, but not for much longer, it is possible to separate out the repair element and treat it as a direct deduction from income.

To qualify as repairs, expenditure must be wholly and exclusively for the purpose of the letting. So putting right anything that a tenant would expect to work properly is included. Repairing a water heater, fixing a leaking roof or window, replacing a damaged door, or emergency plumbing are all clearly repairs. The taxman will also allow any small element of improvement that is incidental to a repair to be set against rental income.

Improvements, expenditure of a 'capital' nature that cannot be set against income, will include the cost of extensions, installing heating or double glazing.

It is not lost expenditure since it counts, when calculating the profit on eventual sale of the property, as part of its costs. But, of course this may be some time off and it is far better to get immediate relief if possible.

So separating out and claiming for the repair element of improvements makes sense.

Beware, this cannot be done where property has been newly acquired so that it can be brought into use. Such costs will be treated as capital.

But in the case of property which needs repairs, the landlord is entitled to claim for the notional repairs included in any building work which improves the property and in so doing saves the need for those repairs.

So, for example, when replacing softwood windows with PVC double glazing, the cost of the work which would have had to be done to make the old windows serviceable (or making single-glazed replacements) can be claimed.

To be able to do this it is important to collect the evidence by way of alternative quotes: for replacement or repair, the other for improvement. Reasonably detailed quotes and final invoices should be sufficient to satisfy the taxman, should the amount be queried.

But note, the concession does not apply where alterations are so extensive as to amount to reconstruction of the property, or there is a change to its use which would have made the repairs unnecessary. This treatment only applies to taxation of rents under Schedule A (there is an Inland Revenue leaflet on the subject IR150 Taxation of rents), not in cases where income is received in connection with a trade.

And it will not apply at all from next April when all improvement spending will be added to the cost of the property.

So the message is, if there are improvements that contain an element of repairs to be done, get them done before the end of the current tax year.

other artilces from the December 2000 / January 2001 issue