The new rules for tax inspectors explain how to claim for integral features and give some examples of how expenses for repairs and maintenance are treated.
Landlords should remember the guidance is just that – HMRC’s internal manuals for tax inspectors have no force in law and are open to interpretation by tax tribunals and the courts.
The main HMRC example in the manual concerns refitting a kitchen. Click here for details.
HMRC’s fictional landlord Sophie owns a property portfolio of unfurnished lets. She needs to replace the boiler in one, which needs relocating in the kitchen, so she decides to refit the kitchen at the same time.
The kitchen is stripped out and new units are fitted that are the same quality of those removed.
HMRC classes this as a repair, so the cost is claimed as a business expense through the annual accounts. In the tax man’s view, the kitchen is part of the house, so the ‘entirety’ of the asset has not been replaced, so it’s not a capital improvement.
Later, the fridge freezer breaks down and is replaced. HMRC explains the fridge freezer is an asset itself and the ‘entirety’ is replaced rather than repaired, so buying a new one is a capital cost, not a business expense.
The point HMRC is trying to make is that changing part of an asset is a repair, providing the change is replacing the part with something that does not improve it.
For instance, installing granite work tops would improve Sophie’s kitchen, so they could be considered an improvement rather than a repair, in which case they would have been a capital cost rather than a business expense.
An important point to remember is ‘integral features’ as if the expense is 50% or more of the cost of replacement, the whole expense is a capital cost and not a repair.
A more detailed explanation is in the HMRC Capital Allowances manual for tax inspectors.
