Tax position on refurbishment of former holiday let
Discussion
In the process of purchasing a derelict coastal property, the same that was once a former Holiday Let. The property will need structural works plus considerable refurbishment. Looking for some advice on the tax situation for a property being converted to a holiday let, are remedial costs, architect’s fees, building works, refurbishment costs tax deductible etc. etc.
If the property requires substantial expenditure to bring it to a state where it can be used to generate income, then I would say that the bulk of this expenditure would be deemed to be "capital" in nature and not simple "repairs and maintenance".
On that basis, the expenditure would not be directly offsetable against income generated by the property. Instead, the expenditure would be added to the original purchase cost of the property and tax relief would eventually be obtained when the property was ultimately disposed of and a Capital Gains Tax computation was being prepared.
SOME of the expenditure might be claimable as simple "repairs" so a careful split between "enhancement costs" and "repairs" would be needed so that some tax relief was obtained against the annual income.
"Holiday Lets" are treated a bit differently for tax purposes than simple "Buy to Lets". HMRC views them as closer to being a trading business than an investment activity. As a result, there are some extra aspects that do apply to "Fully Furnished Holiday Lets" (FHL) which do not apply to Buy to Lets. One of the main ares is the claiming of Capital Allowances.
HMRC Guidance on Capital Allowances on Holiday Lets
"FHLs are treated as a trade for the purposes of giving capital allowances.
FHL businesses are entitled to capital allowances on the furniture, white
goods, etc. within the property but non-FHL businesses do not quality for
these capital allowances. For more information on capital allowances –
what items qualify and how to work out the allowance – read Helpsheet 252
Capital allowances and balancing charges.
The 10% wear and tear allowance that you can elect for if you have an
ordinary rental business is not available as an alternative. There are no capital
allowances for the cost of the property itself or the land on which it stands."
On that basis, the expenditure would not be directly offsetable against income generated by the property. Instead, the expenditure would be added to the original purchase cost of the property and tax relief would eventually be obtained when the property was ultimately disposed of and a Capital Gains Tax computation was being prepared.
SOME of the expenditure might be claimable as simple "repairs" so a careful split between "enhancement costs" and "repairs" would be needed so that some tax relief was obtained against the annual income.
"Holiday Lets" are treated a bit differently for tax purposes than simple "Buy to Lets". HMRC views them as closer to being a trading business than an investment activity. As a result, there are some extra aspects that do apply to "Fully Furnished Holiday Lets" (FHL) which do not apply to Buy to Lets. One of the main ares is the claiming of Capital Allowances.
HMRC Guidance on Capital Allowances on Holiday Lets
"FHLs are treated as a trade for the purposes of giving capital allowances.
FHL businesses are entitled to capital allowances on the furniture, white
goods, etc. within the property but non-FHL businesses do not quality for
these capital allowances. For more information on capital allowances –
what items qualify and how to work out the allowance – read Helpsheet 252
Capital allowances and balancing charges.
The 10% wear and tear allowance that you can elect for if you have an
ordinary rental business is not available as an alternative. There are no capital
allowances for the cost of the property itself or the land on which it stands."
Eric
We've had a normal (not holiday) rental property for years. It had an awful extension which was getting scabby & hard to maintain. So, we've knocked it down, made good & at the same time tidied up the kitchen and had some damp sorted. Total bill about £12k. Capital or revenue costs, or a mixture would you say?
We've had a normal (not holiday) rental property for years. It had an awful extension which was getting scabby & hard to maintain. So, we've knocked it down, made good & at the same time tidied up the kitchen and had some damp sorted. Total bill about £12k. Capital or revenue costs, or a mixture would you say?
Probably a mixture. There is no clear cut line between "enhancement" and "repairs". HMRC expects the taxpayer to know and understand the difference and apply their judgement to the split.
I would suggest that if the property or part of the property was not fit for purpose before the work was carried out, then the expenditure has to be "enhancement". If the expenditure is to keep the building functioning in the way you have been already using it, then "repairs" is a better analysis.
If the expenditure "upgrades" a functioning building by replacing existing facilities with higher grade alternatives, that would normally be treated as "enhancement (i.e. capital) expenditure. The example HMRC would be replacing a basic fitted kitchen with an all bells and whistles modern equivalent. As far as they are concerned that would be "enhancement". Another example of "enhancement" they give is replacing single glaze windows with double glazing or adding a loft extension. The fitting of "fire doors" where none were in place before is an "enhancement". the relcaing of old fire doors with new ones is "repairs".
I would suggest that if the property or part of the property was not fit for purpose before the work was carried out, then the expenditure has to be "enhancement". If the expenditure is to keep the building functioning in the way you have been already using it, then "repairs" is a better analysis.
If the expenditure "upgrades" a functioning building by replacing existing facilities with higher grade alternatives, that would normally be treated as "enhancement (i.e. capital) expenditure. The example HMRC would be replacing a basic fitted kitchen with an all bells and whistles modern equivalent. As far as they are concerned that would be "enhancement". Another example of "enhancement" they give is replacing single glaze windows with double glazing or adding a loft extension. The fitting of "fire doors" where none were in place before is an "enhancement". the relcaing of old fire doors with new ones is "repairs".
Eric Mc said:
Probably a mixture. There is no clear cut line between "enhancement" and "repairs". HMRC expects the taxpayer to know and understand the difference and apply their judgement to the split.
I would suggest that if the property or part of the property was not fit for purpose before the work was carried out, then the expenditure has to be "enhancement". If the expenditure is to keep the building functioning in the way you have been already using it, then "repairs" is a better analysis.
If the expenditure "upgrades" a functioning building by replacing existing facilities with higher grade alternatives, that would normally be treated as "enhancement (i.e. capital) expenditure. The example HMRC would be replacing a basic fitted kitchen with an all bells and whistles modern equivalent. As far as they are concerned that would be "enhancement". Another example of "enhancement" they give is replacing single glaze windows with double glazing or adding a loft extension. The fitting of "fire doors" where none were in place before is an "enhancement". the relcaing of old fire doors with new ones is "repairs".
Cheers EricI would suggest that if the property or part of the property was not fit for purpose before the work was carried out, then the expenditure has to be "enhancement". If the expenditure is to keep the building functioning in the way you have been already using it, then "repairs" is a better analysis.
If the expenditure "upgrades" a functioning building by replacing existing facilities with higher grade alternatives, that would normally be treated as "enhancement (i.e. capital) expenditure. The example HMRC would be replacing a basic fitted kitchen with an all bells and whistles modern equivalent. As far as they are concerned that would be "enhancement". Another example of "enhancement" they give is replacing single glaze windows with double glazing or adding a loft extension. The fitting of "fire doors" where none were in place before is an "enhancement". the relcaing of old fire doors with new ones is "repairs".
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