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Capital or revenue expense for property letting?

Landlord opened up fireplace and installed wood burner as secondary heating

My client's tenants can obtain free logs from their employer so, in a bid to save on gas, asked my client to open up the bricked up fireplace and install a wood burning stove, which my client did at a cost of £2000.  The gas central heating boiler is old but still working and my client is talking about replacing it in a couple of years time - at which time they will want to claim the full cost as a revenue expense.  I said that, as the installation of the stove was not necessary for the purpose of letting the property it would be not be considered a revenue expense but a capital one as it would be seen as an improvement. The client argued that it was secondary heating for the milder months when the full gas central heating is not required  and, that he wanted to help out the tenants by saving them money on gas.  Any comments welcomed.

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12th Jul 2018 18:09

Improvement.

"The client argued that it was secondary heating ...". Yes, it's secondary heating that wasn't there before and is completely unconnected (presumably) to the central heating.

"... he wanted to help out the tenants ..." Reduce the rent then, that's tax-efficient.

By the way no idea what you mean by "necessary for the purpose of letting the property". That's not relevant to the tax treatment.

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By dido24
to Accountant A
13th Jul 2018 11:26

He referred to this excerpt from HMRC guidance for landlords web page 'However, the expense should be incurred wholly and exclusively for the purposes of your property rental business. This means that if an expense was not incurred for the purpose of your property rental business, in any way at all, then you can’t offset the cost against the rental income'. He said he wouldn't have done the work if he wasn't letting out the property to long term tenants.

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to dido24
13th Jul 2018 13:01

dido24 wrote:

He referred to this excerpt from HMRC guidance for landlords web page 'However, the expense should be incurred wholly and exclusively for the purposes of your property rental business. This means that if an expense was not incurred for the purpose of your property rental business, in any way at all, then you can’t offset the cost against the rental income'. He said he wouldn't have done the work if he wasn't letting out the property to long term tenants.

You used the word "necessary", which is different from "wholly and exclusively".

Anyway, that's bye the bye. The expenditure is not revenue in nature for the reasons various respondents have mentioned. If the quote from the HMRC website is correct, it's badly worded. I would guess there is also something in the HMRC guidance which explains that capital expenditure is not allowable.

EDIT: I was right. If your client reads the entire guidance rather than what he thinks supports his case, he will read:

" ... but you can’t claim ‘capital’ expenses.

Expenses are generally ‘capital expenses’ if they will be used in the business over a longer period of time, such as when you:

add something to the property that wasn’t there before".

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By dido24
to Accountant A
13th Jul 2018 13:16

Thank you so much for your help. I will suggest that he read the entire guidance but I doubt he will accept it; he spoke of the rules "penalising poor landlords for helping their tenants" I assume he used the word 'necessary' in the belief that it would carry more force with me (or HMRC) if challenged.

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to dido24
13th Jul 2018 19:03

dido24 wrote:

I will suggest that he read the entire guidance but I doubt he will accept it;

It's not a choice. If he claims it, he is deliberately making an incorrect return and attempting to evade tax. You'd need to disengage and make a SAR.

dido24 wrote:

he spoke of the rules "penalising poor landlords for helping their tenants"

That has nothing to do with applying the correct tax rules to expenditure. He could have knocked £50pm off the rent for 40 months and that would have been tax-efficient.

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By Ruddles
to Accountant A
13th Jul 2018 21:35

Accountant A wrote:
If he claims it, he is deliberately making an incorrect return and attempting to evade tax. You'd need to disengage and make a SAR.

Bollox. While not necessarily disagreeing with the suggestion that the expenditure is capital, the capital/revenue decision is very often subjective and less than clear-cut. I would be advising client to make full disclosure and of the potential consequences of HMRC challenge. Disengagement and SAR is, in my opinion, way OTT

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to Ruddles
13th Jul 2018 22:42

Ruddles wrote:

Bollox.

If you are trying to mimic PNL at least have some technical support.

It's clearly capital expenditure - as everyone apart from you appears to agree - and claiming it as a tax deductible expense is deliberately submitting an incorrect return.

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By Ruddles
to Accountant A
13th Jul 2018 23:17

More bollox - read my post again.

Technical support for what - the argument that the capital/revenue divide is not always clear-cut?

I assume that you and the other respondents were able to inspect the property before and after the works given that you are all so certain of the treatment?

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to Ruddles
14th Jul 2018 08:37

“Disengagement and SAR is, in my opinion, way OTT”

Agree - if we did that for every client who didn’t follow advice we’d have no clients and the fraud helpline on speed dial.

Just send him an email with your advice re capital, get him to email back putting forward his agreements for revenue and instructions thereof.

Save the email on file and (obviously) get him to sign SATR. Simples.

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12th Jul 2018 18:09

id say it was a new feature, not replacing an old feature so capital.

If you did the lot in one go and as a result put in a small boiler/rads in the living room then you might have an argument, but its not too great. Reality is you would do the gas for full heat on its own and you do this as it looks nice.

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By May bee
12th Jul 2018 18:14

I agree, capital improvement all the way for me as nothing is being repaired or replaced.

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13th Jul 2018 08:37

Agree - I vote capital. It’ll be a feature on sale of the property.

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By dido24
to atleastisoundknowledgable...
13th Jul 2018 11:32

Yes, that's what I said and I pointed out that when he sells the property the cost ought to be allowable for capital gains tax purposes but he says he has no intention of selling the property and that the work was done purely for the purpose of continuing his rental of the property long term. He then added that prior to the installation of the wood burner, the water tank in the loft sometimes froze in the winter so the tenants left the loft door slightly ajar to prevent this but since the installation they haven't had to do this.

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13th Jul 2018 11:35

yep capital on the face of it....what relation is the tenant to the landlord (what other landlord would spend £2k on the advice of a tenant other than to either improve the property or increase the potential rent - especially given that any future new tenant is unlikely to be provided with 'free' logs).

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13th Jul 2018 19:05

Your client needs to accept your advice or find another accountant.

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14th Jul 2018 09:14

I think this is one of those occasions where you need to have "that" chat with your client:

You're the expert, he's not

Googling .Gov will only get him into trouble as the advice can't be anything but incomplete (give him prints from the manuals to help him reach that conclusion)

It's no use moaning about tax rules being unfair, they're still the rules

Does he want to sleep easy at night or would he prefer to be worrying about when HMRC come calling?

On balance, this does appear to be a my way or the highway issue

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By dido24
14th Jul 2018 15:59

UPDATE: Having informed him that I have put the situation to other accountants and not one believes it to be revenue, he has capitulated. It doesn't seem to say much for his faith in my interpretation of the tax rules but, hey-ho, objective achieved! Thanks to all who contributed, it's really appreciated.

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