CAPITAL GAINS TAX AND CAPITAL EXPENDITURE

Ramblingrose22 You, yourself, wrote "our records for a lot of the refurbishment expenditure are not very detailed" - I didn't know what that meant, but I know that I keep every receipt for everything I know might be tax-deductible. It was lax of your accountant, if that didn't happen.

David49 My ex has a property portfolio, which is his main source of income. When we were married, I knew what he was doing and was involved with some of it - my children still give me general news and my son gets involved with the management. My ex is a qualified surveyor and my son has an MSc currently employed as a social housing specialist. I've also been a tenant in my current house for 11 years, so I see rentals from both sides of the fence.

My ex has mainly medium-term tenants and completely redecorates between most rentals. Kitchens and bathrooms are replaced as standard every 10 years. He employs a maintenance firm on a more or less permanent basis. He also has an accountant, so everything is logged.

In the 11 years I've lived in this property, I've had all the kitchen white goods replaced, the whole exterior of the house has been repainted, fences and my garden shed roof have been replaced, some rewiring was done and light fittings replaced, a radiator was replaced, two carpets have been replaced, all my taps have been replaced and I'm waiting at this moment for somebody to fit a water softener. I've done some minor maintenance work myself after informing the landlord.

Both my immediate neighbours are tenants and I know they're the same as I am. We keep our houses/gardens clean and well-maintained, but our landlords do major jobs. Not all tenants are "shocking", especially if the properties are well-maintained in the first place and there is mutual respect. Letting properties is a serious business, so people need to research everything - including tax rules - when doing it.

David49 - we ensured that the flats had all been vacated by the tenants in order for the works to be carried out.

Ramblingrose22 but is as you yourself say unfortunately we didn't check with her(your accountant) about the treatment of improvements because we sincerely believed that improvements were capital expenditure.

What is that if not keeping proper accounts?. You should have checked everything and got proper advice. In fact if your accountant did not discuss this all through with you, then you may well have a claim against her for your oversight. She was/is the accountant and should have advised you accordingly.

I never suggested you cut corners or paid people in cash. It never occurred to me that you would, and anyway, if you claimed the annual allowance, you could do that without any problem.

I had a rental flat for some years, mostly one year student lets and went in every year between tenants to make sure all was in good order and any repairs were made. I planned major improvements ahead of tenancy changes so that the workmen went in the day after the students left.

I do apreciate that this less easy wth a long term tenant. DD has just bought a house after a long-term tenant moved out and they left the house in a shocking condition, much of it not obvious until the house was empty.

In practice it’s very difficult to do major refurbishment with a tenant in the property, a new bathroom or kitchen often isn’t possible and the tenant doesn’t always cooperate. Decorating may be able to be done although that’s often a challenge.

I think M0nica and growstuff are making a lot of unkind and incorrect assumptions about the way we have conducted our affairs as landlords. M0nica. - how do you know that we have never kept proper accounts and the "necessary receipts"???And whom exactly are we blaming?

I respectfully suggest that you base your opinions on evidence and refrain from making insulting assumptions about people you don't even know.

We have never been the kind of landlords that think we "can cut corners" and who pay people in cash and M0nica has no evidence to suggest this in relation to us. We have always used accountants for our accounts but unfortunately we didn't check with her about the treatment of improvements because we sincerely believed that improvements were capital expenditure.

This is evidenced by the fact that if we had known our improvements were revenue and not capital at the time we have deliberately done ourselves out of money by allowing ourselves to have a higher capital gains tax bill.

I am sorry that some people on gransnet seek to belittle others who are "guilty" of nothing more than having made a mistake. Fortunately, they are few and far between.

I'm not sure it's such a "mess" *MOnica". Presumably OP has had rental income since owning the flats, which (if reasonably managed) will have been far more than she could have earned in interest from any bank account over the last 12 years. When the properties are sold, I'd be amazed if there isn't some profit (if there isn't, CGT won't be a worry), so she hasn't done too badly.

I agree with you about acting in a business-like manner. Too many landlords seem to think they can cut corners by not employing accountants and/or legitimate maintenance contractors.

Ramblingrose22

Thanks to all for your help so far. It looks like we should have claimed improvements as revenue whereas we thought they were capital.
It is disappointing but our records for a lot of the refurbishment expenditure are not very detailed, so even if we had tried to claim more of the bills as capital expenditure at the right time, we wouldn't have had sufficient *evidence" to show HMRC if they had decided to investigate.
Of course there must be plenty of people who claim anyway to reduce their tax bills but I wouldn't sleep at night if I did that.

As they say, 'with due respect' Surely you should have sorted out the tax and accounting regime when you and your co-owners inherited the property 12 years ago. Kept proper accounts and kept the necessary receipts.

Problems like yours arise because of the failure of people to act in a business like way at the start of an enterprise and blame others for their failure when they end up in a mess like this at the end.

PS. Make sure you keep detailed records/receipts and don't pay people cash in hand.

If you let, carpets, curtains, paint, heating systems and even bathrooms and kitchens should be replaced at various intervals anyway, if you're going to keep a habitable property. That's why they're revenue expenditure - they're legitimate business expenses, just like the annual gas check and periodic electricity and fire/CO2 alarm checks. They possibly won't affect the value of the property for resale - except that if you keep a property for a long time and don't do anything, you'll end up with a property which needs modernisation (and sells for less).

Thanks to all for your help so far. It looks like we should have claimed improvements as revenue whereas we thought they were capital.
It is disappointing but our records for a lot of the refurbishment expenditure are not very detailed, so even if we had tried to claim more of the bills as capital expenditure at the right time, we wouldn't have had sufficient *evidence" to show HMRC if they had decided to investigate.
Of course there must be plenty of people who claim anyway to reduce their tax bills but I wouldn't sleep at night if I did that.

David49

In practice a property owner would claim the cost of improvements as repairs and maintenence if possible because that gives immediate relief of Income Tax. If he owns several properties refurbishing one completely in a tax year might be within the limits allowed, it’s more difficult if only one property is owned.

OP owns three flats. It should be possible to rotate refurbishments to maximise tax relief, but (as Silverbrooks has pointed out) she is now out-of-time to claim it on past improvements.

My exDH has a property portfolio and I know he is constantly refurbishing and timing the sales of the properties to maximise tax relief.

In practice a property owner would claim the cost of improvements as repairs and maintenence if possible because that gives immediate relief of Income Tax. If he owns several properties refurbishing one completely in a tax year might be within the limits allowed, it’s more difficult if only one property is owned.

When I owned a flat that I let out and generally maintained and kept uptodate and in good order, there was an annual allowance to cover all the general maaintenance. Either you claimed the amount of specific invoices, or you had an allowance of something like, 10% of revenue.

It is generally considered that money you spend to keep ia property up to date and in good order will be recouped through the price - and you pay capital gains tax on this.

… capital expenditure is only structural changes like a new extension that adds value to the property.

That isn’t strictly true although distinguishing between revenue expenditure and capital expenditure can be tricky.

Bear in mind that just because an item is brand new does not make it an improvement over an item which has been in use for several years and suffered general wear and tear.

It’s always a good idea to refer to the HMRC manual on these kinds of questions:

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030

Key questions are whether the expenditure had extended the life of the property or provided an additional asset.

Note what it says in the HMRC manual:

Problems can arise where the customer does work on an old asset. A repair or replacement of a part of a building using modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new material. But the cost normally remains revenue expenditure where any improvement arises only because the customer uses new materials that are broadly equivalent to the old materials.

Were you to replace a kitchen or bathroom with something of superior quality to the old one (irrespective of the condition of the old one) then that could constitute capex. Replacing an old 1970s MFI kitchen with something high-end bespoke and luxurious, for example, could be considered an additional asset. But replace an old 1970s MFI kitchen with a budget kitchen from Wickes and that would be revenue expediture.

In a way, you have answered your own question. You spent the money to make the property more attractive to potential tenants, presumably to achieve higher revenue. Even tired, tatty properties will find a tenant albeit at a lower rent. You incurred revenue expenditure to achieve revenue.

There are some special rules relating to expenditure on dilapidated properties - see under Repairs after a property is acquired in the HMRC manual. The rewiring could be claimed as capex.

You are out of time to claim non-capex items against revenue.

It sounds as if your accountant has already told you the answer.
I’ve one property which I rent out, and like you, I’ve improved it over the years and replacing floor coverings, the boiler, kitchen and one bathroom over the years, not to mention re-decoration between tenants.
However, I’ve just considered that part of keeping the property up to date and of course making it more attractive to prospective tenants - there’s never been a significant gap between them.
As you’ve found, the allowable profit before GCT kicks in has been significantly reduced. My property hasn’t gained much in resale terms in the 14 years I’ve owned it (from new) but I consider I’ve made my ‘profit’ in rental income.

Where’s GSM ? Really miss her….