Updating post from Reddit.
good morning all,
Hopefully someone might be able to assist with a question.
Wife is a landlord and doing her tax return. She's made a massive loss on the rental this year as she had to knock down an extension and rebuild costing £45000. Her rental income was about £12000.
When doing the tax return it's still expecting her to pay about £3500 in tax which to us makes no sense as we are in a loss. Does this sound "normal" to anyone whom might know. We assumed because of the loss she would effectively pay nothing?
Have we got this completely wrong?
Thanks in advance.
The £45000 is not an expense as you’ve used it to make improvements to the property.
You’re paying tax on the £12000 income so it is correct.
Thanks for the reply. As the other commenter has questions. It was a like for like essential repair for safety reasons.
Depends if this was a like for like essential replacement due to health and safety then it isn't betterment or improvement and can be offset against this year's rental income. If it was an improvement then it can only be counted as such and you can offset the amount against CGT when you sell only.
It sounds like HMRC have counted it as an improvement and not an essential repair.
Best advice here is ring HMRC and ask their advice explaining what was there before and that this is a like for like replacement if indeed that's the case and fingers crossed they will see it as an essential repair not a home improvement.
If they see it as an improvement make sure you keep the entire bill paperwork and offset the cost against gains when you sell your property.
This would have been on the self assessment surely and OP’s wife probably put it down on the wrong section on the form
This. I have renovated an apartment and replaced all furniture after 5 years of tenants. My accountant was able to get it classified as opex and get it deducted from that year’s revenue + tax loss carry forward. I think the rules allow you to do both - it depends which way you argue.
So the original extension was built poorly in wrong foundations so for safety and to get building regs it needed knocking down.
So you're going after the original builders for your money back right?
the £45k rebuild counts as capital expenditure, not an allowable expense for income tax. That means it doesn’t reduce this year’s rental profit, only helps later for Capital Gains if you sell. That’s why there's still tax due.
Thankyou. It hurts having to pay the tax when we are already at such a large loss. Wife's fault for picking dodgy builders.
I've let her know the bad news.
This is correct because this would be considered a capital expense, not a revenue expense.
A capital expense is something Hmrc would considers can change the value of the property rather than be treated as a repair, this also happens when you replace the roof.
The only time it is not considered a capital expense is if somehow the builder used the exact same materials to "repair" and build the exact same extension, this doesn't really happen unless it's a grade listed building with extensive proof of same materials used.
She will only be able to claim this capital expense when it comes to selling the property.
I am not a qualified accountant and would advise for an opinion from one but i'm fairly certain that's how it works.
Thanks for the info! Looks like you're all in the know about this and have the same answer. Thankyou.
Might be worth getting an accountant to help you with this. If it's classed as an allowable expense they can help you carry forward the loss to next year, helping with your tax situation.
Thankyou my wife has just said that actually. We will speak with an accountant.
I'm an accountant, (and a landlord).
Everyone else is correct, this is capital expenditure. End of. See also:
>Extensive alterations to a property
>Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure and it can't be deducted as an ordinary revenue business expense. Rebuilding, whether forced on the customer or voluntarily undertaken, is capital expenditure and the whole cost can't be deducted in computing profits.
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030
Thanks for letting me know. Wife is absolutely gutted. Such a big loss for us.
So basically we would save that money in the future if we sold the house offset against capital gains tax?
Ideally we won't be selling the house. For many many years.
Yes the £45k would come off your gain
You have experienced a capital loss with the extension not deductible from income. The rebuild when it gains in value may also be due capital gains tax if sold at a later date.