Repairs or improvements? The landlord distinction that costs the most

Of all the judgement calls in property tax, this is the one that produces the most lost money and the most HMRC queries. The principle sounds simple. Applying it to an actual invoice from an actual builder is where it gets difficult.

The principle

A repair restores an asset to its previous condition. It is a revenue cost, deductible against your rental profit for the year. An improvement makes the property better than it was, or changes what it is. That is capital expenditure — not deductible against rental income at all, but added to your base cost and relieved against the gain when you eventually sell.

So neither treatment loses the deduction permanently. But the timing difference can be twenty years, and the rate at which relief is given differs. It matters.

Where it gets awkward

• Replacing a rotten single-glazed window with double glazing is generally a repair, because double glazing is now the standard equivalent — not an improvement over the original.
• Replacing a tired kitchen with a similar-quality kitchen is generally a repair. Replacing it with a substantially higher-specification kitchen, or reconfiguring the room, moves towards improvement.
• Work done before the property is first let, to make it fit to let, is generally capital — it is part of acquiring a lettable asset.
• A single invoice covering both a repair and an improvement should be apportioned, not treated wholly as one or the other.

Replacement of domestic items

Furnishings and appliances in a residential let follow their own rules: relief is given on replacing an item, not on providing it in the first place, and the relief is limited to the cost of a broadly equivalent replacement. Upgrading to something noticeably better only gets you the like-for-like amount.

Keep the evidence

If a treatment is ever queried, the argument is won or lost on contemporaneous evidence. Photographs before and after, an itemised invoice, and a short note of why the work was needed take ten minutes and settle the question. Without them, you are asking an inspector to accept your recollection.