First BTL & repairs: how does the cash basis work?

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Hello,

Non-accountant asking for advice, please. Last November I bought my first BTL flat. I’m wondering how to differentiate between capital and revenue expenses, especially when using the cash basis.

  • 14/11/2018 – Purchase completed; flat remained empty until…
  • 8/1/ - 11/3/2019  – Repair work (decorating, replacing kitchen with similar, etc.)
  • 8/3/2019 – First tenants moved in (while annoyed builders still finishing off…)

As I understand it, for HMRC’s purposes the date of the first letting (8/3) marks the start of my “rental business”. Repairs carried out before that have to be booked as capital expenses; after that date repairs are revenue exp. and are allowed against rental income. Costs like Council Tax, water, electric, building service charges, property insurance are revenue exp. (even those paid before 8/3). Does that sound reasonable?

What I’m confused about is whether the pre- / post-first letting distinction between capital and revenue exp. for repairs is overridden by the cash basis? For example, in January the builders gave me a quote for  £4000. I paid two advances of £1k before 8/3 and the balance of £2k after 8/3. So is that £4k of capital exp., or a split of £2k capital exp. + £2k revenue exp. (because on the cash basis, the £2k payment was made post-letting)?

On 19/2  I paid £250 for laminate flooring (replacing worn laminate). I eventually returned some and got a refund of £50 on 12/3. So do I treat that as a capital exp. of £250 and then “refund income” of £50?

Around £1200 of work done before 8/3 was invoiced after 8/3 and paid for on 22/3. Does that count as capital or revenue expense?

All advice gratefully received.

- PJ

Replies (14)

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By Duggimon
04th Oct 2019 14:13

PJ7 wrote:

Hello,

Non-accountant asking for advice, please.

Let me just stop you there, get an accountant.

It might not be the advice you want but it's better advice than the advice you hoped to get.

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Replying to Duggimon:
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By PJ7
04th Oct 2019 14:42

Well I would, but it's not so easy logistically because I live outside the UK.
I was hoping I could do it myself, because in future years I'll only have (relatively small) rental income minus service charges, letting agent fees and any repairs that need doing.
I'm just a bit stuck with the first year's figures due to the renovation prior to letting.
- PJ

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Replying to PJ7:
By Moonbeam
04th Oct 2019 16:33

The value of any advice would be worth paying for even if you are overseas. Any good accountant you engage will ask you lots of supplementary questions and want to see the receipts. All for the purpose of giving you the best possible advice to minimise your tax position.

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Replying to PJ7:
RLI
By lionofludesch
04th Oct 2019 16:47

PJ7 wrote:

Well I would, but it's not so easy logistically because I live outside the UK.

In these days of the internet ?

Outside the UK is the same as living next door.

So folk tell me - in the same breath as calling me a Luddite.

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RLI
By lionofludesch
04th Oct 2019 16:50

To answer your key question, no, the cash basis doesn't override the capital revenue distinction.

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By Paul Hawes
04th Oct 2019 17:00

You should be careful that not all "repairs" will necessarily be revenue in nature just because you have a tenant occupying the property.

It shouldn't be too difficult logistically to get a UK accountant just because you're out of the country. You can always scan or take pictures of invoices. Worthwhile as you'll be setting yourself up for problems otherwise.

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By PJ7
04th Oct 2019 17:16

Thanks for all the responses so far :-)
I can understand why you think a UK accountant would be a good idea. However, I don't think there will be any tax to pay in the UK in any case. We're talking about a small flat in a fairly small town, so the rent isn't huge... And I have no other income in the UK. The rent income - even without any allowable expenses - will be well below my personal allowance (which I should be entitled to, as a UK passport holder).
I just posted my question because my local accountant looked a bit blank when I started talking about UK pre- and post-letting expenses...

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Replying to PJ7:
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By Paul Hawes
07th Oct 2019 12:59

There might not be any UK tax due, but you may need to declare rental profits on your local tax return?

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By John R
04th Oct 2019 17:27

I agree that you should seek advice from an accountant with a good knowledge of property letting taxation. You should, in particular, seek advice as to whether the new kitchen is claimable as revenue as this is likely to be a large sum. The fact that expenses of a revenue nature are incurred prior to letting does not necessarily preclude a claim. There are circumstances where such costs can be treated as incurred on the first day of letting. The accountant will need to ask a number of questions before being able to advise you properly.
Edit - posted before I read your last post. It will probably therefore be advantageous for as much expenditure as possible to be of a capital nature, which you may be able to argue if the property was not fit to let on acquisition.

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Replying to John R:
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By Tax Dragon
04th Oct 2019 17:31

John R wrote:

Edit - posted before I read your last post. It will probably...

...that's why I love you
So don't be afraid to let them show
Your true colours
True colours
Are beautiful like a rainbow

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By justsotax
07th Oct 2019 13:44

(1) logistics clearly not an issue as you have managed to find a UK site which may be able to assist you with your queries - much the same as an accountant would....through the power of email.

(2) 'I don't think there will be any tax to pay...' is the very basis on which checking with someone who knows the rules is a good idea.

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By John R
07th Oct 2019 13:55

As a matter of interest, are you expecting a repayment of tax or did you successfully apply under the Non-Resident Landlord scheme?

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Replying to John R:
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By Tax Dragon
07th Oct 2019 14:56

Ting!

I guess I should add something more useful while I'm back here...

In reference to the OP's "I just posted my question because my local accountant looked a bit blank when I started talking about UK pre- and post-letting expenses..."

erm, as has been pointed out, while commencement of letting may be an important point, it's nothing to do with the capital/revenue question.

And on Paul's reply ("There might not be any UK tax due, but you may need to declare rental profits on your local tax return?"), there's no guarantee that UK accounts would determine local tax.

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By PJ7
08th Oct 2019 19:41

Thanks for the additional comments, and sorry to take so long to get back. I actually thought this thread had faded away, as I don't seem to be getting the email notifications any more.

Regarding your questions:

- I did apply for non-resident landlord status and it was granted ok. So the letting agents are paying me rent without deduction of tax.

- Local taxes: Yes, I have to declare my UK rental profits to the local tax office. The accountants who do the books for my (very small) business don't want anything to do with UK rental income, quite understandably. However, the form is quite simple - something like:

Foreign rental income
Foreign allowable expenses
Foreign tax paid

The tax year is 1 Jan - 31 Dec, with tax returns due in April. I contacted the local tax office and explained that the UK tax year runs from 6 April with returns due on 31 Oct (i.e. for "customers" outside the UK). I suggested that I would file in arrears when the UK position is clear. So I'll submit my UK return for the year to 5.4.19 by the end of this month. Then I'll declare the figures on my local tax return that will be submitted in April 2020 (I think those were the dates, but I don't have the papers with me at the moment. But that's the general idea).

The tax people seem happy with this suggestion - in fact, a lot of local folk with BTLs apparently forget to declare their rental income...

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