Repairs or improvements? The line that costs landlords money
When a kitchen replacement is a repair and when it is capital. Why the line moves over time. How to keep the evidence pack tight.
The legal test
The HMRC test for whether work is a repair (deductible against rental income) or an improvement (capital, added to base cost for CGT) is whether the work restores the property to its previous condition or improves it. Replacing like-for-like is repair. Upgrading is capital.
In practice the test gets blurry at the edges. The key principle: substitute material improvements that come from changes in technology or building standards do not automatically make a job capital. A modern double-glazed window replacing a worn double-glazed window of similar specification is a repair, even if the new one is more efficient. Replacing single glazing with double glazing is capital.
The kitchen example
Kitchens are where landlords most often get this wrong. A failing fitted kitchen replaced with one of equivalent quality, layout, and specification is a repair. Knocking out a wall to extend the kitchen, or upgrading from a basic builder-spec kitchen to a high-end Shaker-style one, is capital.
A common pattern: replacing every unit with broadly equivalent units, but adding an island that did not exist. The replacement of the existing units is repair; the new island is capital. The same invoice can split between the two heads.
Common errors
- Treating a whole kitchen replacement as repair without checking the spec of what was there before.
- Treating any large invoice as capital because the cost feels too big to deduct in one year.
- Splitting a single item (e.g., a boiler) artificially across years to claim repair status.
- Treating tenant-induced damage repairs as capital because they happen to coincide with a void period.
The classification matters now (current year tax deduction) and later (CGT base cost on eventual sale). A misclassified £10,000 capital improvement counted as a repair gives you £4,000 of immediate tax saving at higher rate, but loses you £2,400 of CGT relief on disposal at higher rates. Net loss: £6,400 if the property is held long-term.
The evidence pack
A defensible classification rests on documentation. Network firms ask for: the original property condition (photos, surveyor reports), the specification of items being replaced, the specification of items going in, and the contractor’s itemised invoice showing both labour and materials. With that pack, the split between revenue and capital can be reconstructed years later if HMRC ask.
For ongoing landlords, the simple rule is: photograph everything before and after, keep itemised invoices, and ask the contractor to label upgrades as upgrades. It costs nothing at the time and saves significant grief later.