Investment Property- Capital & Revenue costs?

ian5708

Hi everyone,

I've recently bought, renovated and rented out a second property.

Over the past 10 years I have rented out a flat and I have always done my own HMRC returns online and I think I've been pretty certain on what I can class as expenses such as ground rent, building insurance, fixing taps, fences, heating etc. I have not had any queries with HMRC to date.

My second rental is a maisonette which I purchased with a short lease of 49 years remaining. After its purchase I extended the lease by 90 years for a premium of £13,750

I had to pay the Landlords legal fee of £1000, his Valuation fee of £780 and of course my legal fees for the lease extension.

The property hadn't seen any decoration or modernisation in the previous 35 years and to get it up to a good standard to rent out I did almost all of the work myself over 18 weeks.

I'm a little unsure of what are capital costs and what are my revenue costs which I can offset against my rental income as expenses.

The following I believe are capital costs:

£13,750 Lease renewal premium
Central heating system(installed by gas safe engineer)
New Bathroom suite
Bathroom tiles, grout, sealant, taps, pipes, fittings
Bathroom flooring
New kitchen floor
Lounge mirror over fireplace
Lighting
Cooker hood & Stainless splashback
Replacement curtain poles for rails
Vertical blinds
Replacement carpets
Replacement internal doors and fittings
Total £4584
Plus SDLT on purchase


The following I 'think' are Revenue costs:

Electrical work - new consumer unit, wired co2 detector, smoke alarms, cooker feed, replacement switches/sockets
Decorating Materials Paint - wallpaper/paste, wood, caulk, plaster,fillers & sealants, sand papers, solder, glue, cloths, drop sheets, anti mold,
Decorating Tools - Electric sander, Heat gun, paint roller & sleeves, brushes, buckets, dust masks, paper hanging tools, blow torch, soldering iron, electric saw and blades, screws etc
New electric fire in place of a very old gas fire.
Replacement door handle & Lock
Key cutting
Building Insurance
Replacement lamp shades and lighting
Landlords Lease extension legal and survey fees £1780
My lease extension legal fees and connected costs £470
My travel costs from home to and from the property 2712 miles @ 45p/m £1220
Total £6345

I know from browsing info on the web that if I spoke with a number of accountants or even different HMRC officials there would probably be different interpretations of the law and what they deem to be capital and what they consider revenue.

However do you think I'm reasonably correct here?

If I get it wrong and get my return investigated could I find myself in a lot of trouble and facing significant financial penalties for getting in wrong and not using a accountant to file my return?

Finally, I did not pay any stamp duty on the lease extension premium. I extended the lease with the co operation of the Landlord a few days after the property purchase completion date. Obviously, if the vendor had extended the lease before I made the purchase, that premium would have been added onto the sale price and I would have paid more SDLT on the purchase price.
Am I legally liable to pay SDLT on the lease extension premium? Could it be deemed a 'linked transaction' and that I have avoided SDLT by extending the lease seperately?

I have tenants in now and they pay £530 PCM

I know I'm asking a lot but I would appreciate any sound advice to ensure I'm complying with UK tax law the best way possible.

Many thanks

Ian

Pennywise

Was it actually let-able in the condition you bought it in?

ian5708

Well, it had hot and cold running water, a gas fire that did not light, no other forms of heating. The bathroom and kitchen were functional, but I'm sure someone would have taken it at a significantly reduced rent. Maybe £350 instead of £530 since improvements.

It was very old and grotty.

Pennywise

Generally, the HMRC argument is that if you paid substantially less for the property because it wasn't in a fit state, then the costs of bringing it back up to standard are capital. Basically to put it into the same state it would have been, at similar cost, to had you bought a "done up" property in the first place. So maybe little, if anything on your list is revenue at all.

The usual advice to get around their challenge is to do the bare minimum to legally let it out for a 6 month tenancy, and then do the major renovations, in which case there is usually no challenge on the grounds that it was clearly habitable as you actually did let it. 6 months at a lower rent is usually a better deal than losing the tax relief.

But of course, even if capital, you get relief from the eventual sale, so it's all just a matter of tax relief timing anyway.

chrismac1

For what it's worth in my view HMRC are unbelievably lax in this area compared to 20 years ago. I have lots of clients who've done major refurbishments of over £100k. Like yours you often end up with 20% black (capital), 20% white (revenue) and 60% grey - could be revenue or capital depends on what tax cases you take as your precedent.

So far nada, not one single enquiry on what must be by now £2m or so spent in this area on my client base, of which on average 60% is "grey" so that's over £1m of "grey area" items, which of course have been put in the "white" tax return boxes 90% of the time because 90% of the time that's what clients want.

When you consider some of the mind-boggingly stupid tax cases I have had to defend in that period - which HMRC had no chance of getting anything from and indeed got nothing from - it really makes you wonder what the Hell we pay them for.

Anyway I think you've made a decent fist of your cost analysis and as long as you don't claim any "black" items - stamp duty and lease premium - as "white" you should be fine.

ian5708

Many thanks for taking the time to read through my post Chrismac1 and give me your thoughts and experience. Its much appreciated.

I just wanted to ask you about my 7 line paragraph toward the bottom of my post, regarding whether I am liable for SDLT on the Lease Extension premium, bearing in mind that I extended the lease approx 1 week after completion of the property purchase. Thanks in advance.

chrismac1

I'm not really an expert on SDLT. As a matter of principle I think that if there is evidence the lease extension was in any way part of the purchase agreement HMRC would have a strong case for assessing it.

In your position I would want whatever written evidence I could get that there was clear blue water between the two transactions. Bear in mind these cases can be several years down the road so you don't want to be just relying on hearsay or memory, you want a little file with relevant PDF documents ready to fire back at HMRC.