The Statutory Framework, Repairs Deductible; Improvements Capital
Under ITTOIA 2005 s.272, landlords can deduct expenses incurred wholly and exclusively for the purposes of their property business. Under s.33, no deduction is allowed for capital expenditure. A repair maintains the property in its existing state, revenue expenditure; deductible in the year incurred. An improvement enhances the property beyond its existing state, capital expenditure; not deductible against rental income but eligible to increase the CGT base cost (reducing the gain on future disposal). HMRC's Property Income Manual (PIM2020-PIM2055) applies these principles to common landlord scenarios. The same rules apply to companies under CTA 2009 ss.53-54.
- ITTOIA 2005 s.33: no deduction for capital expenditure; the fundamental rule preventing improvement costs from being deducted against rental income
- Repair = maintaining existing state: deductible in the year incurred; reduces rental profit immediately
- Improvement = enhancing beyond existing state: capital; not deductible against income; increases CGT base cost for future disposal
- HMRC PIM2020-PIM2055: detailed guidance on common scenarios; the starting point for any landlord expenditure analysis
- Company landlords: CTA 2009 ss.53-54 applies the same principles; no deduction for capital expenditure against company property profits
The Entirety Principle, What Asset Is Being Repaired?
The 'entirety' is the relevant asset for the repair/improvement distinction. O'Grady v Bullcroft Main Collieries Ltd (1932) established that a new engine is a repair to the ship (the entirety), not a separate improvement. For a landlord, the entirety is typically the whole building. Replacing the entire roof to restore it to its function of keeping the building weathertight = repair to the building (entirety), even if the new roof is better quality. Replacing single-glazed windows with double-glazed units = HMRC treats the upgrade element as capital improvement (beyond the existing single-glazing standard); replacing like-for-like double-glazing with double-glazing = repair. Remodelling, reconfiguration, or adding new rooms = capital improvement (altering the asset, not maintaining it).
- Entirety = the whole building for a let property: the relevant asset; individual components are parts of the whole
- New roof replacing old roof: repair to the building even if the new roof is of better quality, the function is maintained, not added to
- Single to double glazing: HMRC treats the upgrade element as capital; like-for-like double-glazing replacement = repair
- Remodelling and reconfiguration: altering the asset rather than maintaining it = capital improvement
- Replacing whole component: raises improvement risk; the entirety principle helps argue repair where the component serves the same function
The Initial Repairs Doctrine, Newly Acquired Properties
Law Shipping Co Ltd v IRC [1923]: expenditure to bring a newly acquired asset into a usable state is capital, not deductible revenue repair. Odeon Associated Theatres Ltd v Jones [1971]: confirmed and applied to property, works on a dilapidated property acquired at a discounted price to bring it to a lettable standard are capital (the discounted price reflects the dilapidated state; the works restore the asset to the capital value paid). HMRC's PIM2030 applies the doctrine where: the property was unusable for the business when acquired; the purchase price reflected the dilapidated state; the works were necessary to make it usable. Initial repair costs add to CGT base cost rather than being deducted against rental income. To reduce the risk: let the property (even briefly, in its existing state) before commencing works.
- Law Shipping [1923]: expenditure to put an asset into a usable state = capital, not revenue; the initial repairs doctrine
- Odeon [1971]: property acquired at discount reflecting dilapidation; works to bring to lettable standard = capital
- HMRC PIM2030 conditions: (1) unusable when acquired; (2) price reflected dilapidation; (3) works necessary for use, all three typically required
- Capital consequence: initial repair costs increase CGT base cost; not deductible against rental income in the year of works
- Mitigation: let the property briefly in its existing state before carrying out major works; breaks the 'unusable when acquired' argument
Common Expenditure, How HMRC Treats It in Practice
Practical application of the repair/improvement distinction: roof replacement (like-for-like) = repair; adding insulation or green roof = capital. Kitchen/bathroom like-for-like replacement = repair; upgrade in specification or layout change = capital. Boiler replacement with equivalent = repair; heat pump replacing gas system = capital; adding heating where none existed = capital. Rewiring to restore safe occupation = repair (where existing wiring failed); new damp proof course installation where none previously existed = capital improvement; restoration of a failed DPC = repair. Extensions and loft conversions = always capital. Replacement domestic items relief (RDIR under ITTOIA 2005 s.311A): from April 2016, landlords of furnished residential lets can deduct the cost of replacing domestic items (sofas; beds; white goods; floor coverings) on a like-for-like basis, replacing with a better item allows deduction only of the equivalent replacement cost.
- Roof (like-for-like): repair; adding insulation or green roof = capital improvement
- Kitchen/bathroom: like-for-like replacement = repair; specification upgrade or layout change = capital
- Boiler equivalent replacement: repair; heat pump replacing gas system = capital; new heating system where none existed = capital
- Extensions and loft conversions: always capital; additions to the building cannot be repairs
- RDIR (ITTOIA 2005 s.311A): deduct cost of replacing domestic items like-for-like in furnished lets; upgrade excess is capital; applies from April 2016