Buying a property in need of work is cheaper than buying one where everything has been done. However, the costs involved in renovating or altering a property are likely to be significant. The extent to which any tax relief is available will depend on how the property is used and on the nature of the expenditure.
Capital vs Revenue
The costs of refurbishing or repairing a property purchased in a derelict or run-down state are capital expenditures.
Likewise, expenditure which adds or improves the land or property is capital expenditure.
Where the alterations to a property are so extensive as to amount to the reconstruction of the property, the expenditure will be capital expenditure.
Any repairs will remain revenue in nature even when undertaken at the same time as major capital works.
Splitting costs between capital and revenue
Where work undertaken on the property includes both capital works and repairs, the expenditure should be split just and reasonable. The amount of the capital expenditure (and what it relates to) and the amount of the revenue expenditure can be clearly identified.
Relief for revenue expenses
Where there is a property income business or a furnished holiday lettings business, relief is available for revenue expenditure to the extent that the costs are incurred ‘wholly and exclusively for the business. Where the revenue expenditure is incurred during works undertaken in getting the property ready to let, relief may be available under the normal rules if the landlord has other properties.
Where there is no existing business, and the property is purchased with the intention to rent it out or to use it as a holiday let, any revenue expenses incurred in getting the property ready to let are relievable under the pre-letting rules. This treats the expenses as if they were incurred on the day that the business started, as long as they have been incurred in the previous seven years and relate wholly and exclusively to the business.
Relief for capital expenditure is, in the main, given under the capital gains tax (CGT) rules when the property is sold. Consequently, where extensive alterations are undertaken to a property which is either let as a residential let or used as a furnished holiday let, relief for the capital expenditure will normally be given in computing the chargeable gain or allowable loss on the eventual sale.