Revenue expenditure
Broadly, revenue expenditure is incurred in the day-to-day running of the business. In the property business, the landlord may typically incur the following items of revenue expenditure:
• Accountancy fees.
• Advertising for tenants.
• Cleaning.
• Office expenses.
• Staff costs.
• Interest and finance costs.
• Gardening.
• Travel costs.
• Repairs and maintenance.
Care should be taken in determining whether work undertaken on the property is maintenance or a repair, or is an improvement. The distinction is important; while repairs and maintenance costs count as revenue expenditure, any money spent on improving or enhancing the property will be capital expenditure.
Costs incurred in keeping the property in a good state of repair (e.g., repointing brickwork, replacing loose roof tiles and suchlike) will usually be revenue in nature.
Relief for Revenue Expenditure
The general rule is that expenses can be deducted if they are incurred wholly and exclusively for the purposes of the business. The treatment of revenue expenditure is the same regardless of whether the accounts are prepared under the ‘cash basis’ or under the ‘accruals basis.
Capital Expenditure
Capital expenditure is, broadly, expenditure on items that are retained in the business and which are used to generate profits. In a property income context, this will include the cost of the land and the property itself, the cost of any new building erected after the letting has started, and any enhancement or improvement expenditure. As noted above, legal costs incurred in relation to capital expenditure (e.g., the purchase of the property) are also capital in nature.
Other examples of expenditure that may be incurred by a property business which are capital in nature include:
• Expenditure that adds to or improves the land or property (e.g., converting a barn into a holiday home).
• The cost of refurbishing or repairing a property brought in a derelict or run-down state.
• The cost of furnishings for a property that is let furnished.
• Equipment, such as domestic appliances, which are purchased for a let property.
• Vehicles, such as cars or vans.
Relief for Capital Expenditure
The rules governing the relief for capital expenditure depend on whether the accounts are prepared under the ‘accruals basis’ or under the ‘cash basis’.
Landlords letting residential property are not able to claim capital allowances; however, a separate relief applies to replacement domestic items. This relief allows the cost of a like-for-like replacement to be deducted in computing profits, although no relief is given for the initial cost.
Relief for the cost of the actual property itself, plus any enhancement expenditure, such as the cost of an extension, is given through the capital gains tax system when the property is sold. The cost of the property, plus any enhancement expenditure and the associated costs of acquisition and sale (legal fees, estate agent’s fees, stamp duty land tax, etc.) are deducted when computing the gain or loss on disposal.
Advice
To ensure that relief for expenditure is obtained in the correct manner, make sure that the expenditure is correctly identified as revenue expenditure or capital expenditure.