ACM Cladding/Timber Balconies replacement - Allowable Expense or Capital Expenditure?

haveabreak

Hello everyone

A leasehold property owned (currently let out to tenants) has fortunately secured Government funding to replace ACM cladding and related timber material found in the development (block of purpose built flats). The management company has however informed us that a certain number of timber balconies (that need replacing with safer fire-resistant material) are not eligible for funding from the Government. This work will need to be funded by the leaseholders and we are expecting to get an estimate of the cost soon.. 
The property owned does not have a balcony. But balconies are classified as communal, hence so is any remedial work and shared across all leaseholders. As an estimate the cost is expected to be £5k-10k. 

My question is this: Is this cost an Allowable Expense (revenue) and thus deducted in the calculation of profit on Self-Assessment? Or is it classed as a Capital Expenditure and so deducted when calculating capital gains when the property is sold?

Many thanks in advance.

Jeremy535897

Presumably your question relates to a flat you let out?
See https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030

If you are replacing one balcony with another, albeit to a higher standard due to developments in technology or safety, I would suggest that is analogous to replacing single glazing with double glazing, which can be a repair.

haveabreak

Yes is is let out. If it indeed is classified as repair, would the cost be apportioned across the period the works are taking place? E.g is the work period lasts 10 months from now and I pay £5k in advance now. Would I pro-rata the cost across this tax year (2020-21) and next tax year (2021-22)?

Jeremy535897

haveabreak said:

Yes is is let out. If it indeed is classified as repair, would the cost be apportioned across the period the works are taking place? E.g is the work period lasts 10 months from now and I pay £5k in advance now. Would I pro-rata the cost across this tax year (2020-21) and next tax year (2021-22)?

Unless you elected otherwise, rental income is assessed on a cash basis. You pay tax on rent when it is paid, and claim expenses when they are paid. See https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1094

I think you would have to show that the payment in advance was committed funds, with an invoice being issued, otherwise it may just be regarded as a loan to the builder.

haveabreak

I receive rent in advance for the whole tenancy period (12 months) in advance around September. This is pro-rata across the tax years. So I assumed the cost of repair for the balcony would be too?

Jeremy535897

haveabreak said:

I receive rent in advance for the whole tenancy period (12 months) in advance around September. This is pro-rata across the tax years. So I assumed the cost of repair for the balcony would be too?

The cash basis applies from 2017/18 by default in most cases, unless you elected otherwise. Did you?

haveabreak

My accountant did it this way so I presume it is right.

Jeremy535897

If you have an accountant, why are you asking this forum?

haveabreak

The accountant did my previous year SA as I also had other business to settle on it back then. I normally have done SA myself and intend to going forward. So I am just asking here for tax planning purposes.

haveabreak

I am also trying to ask HMRC but it is a real pain trying to get hold of a technical advisor. Ideally I would a view before the end of this tax year.

Jeremy535897

You need to ask your accountant whether they made the election to opt out of the cash basis when completing your self assessment tax return. That is what determines how you account for income and expenses. See Box 20.2 of SA105(2020):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/874009/SA105_English_Form.pdf