Rental losses or capital losses?

Hi Peter

If this is your only rental property and you don't intend to buy more then a blend of capital and income losses might well suit you best.

If you have other properties, which produce rental profits, and depending upon what rate of tax you pay, it may be more advantageous long term to take the rental losses and roll them forward.

I recommend you to take professional advice.

Here's a link to the member profile of my accountant >>> http://www.property118.com/member/?id=452
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As Mark says, you need an accountant to advise you.

I'm not an accountant but I know that in most cases you can't simply decide whether to offset costs against rental income or CGT, it will be determined by the facts of the matter.

As a general rule, my understanding is that if you've replaced something on a like-for-like basis because its damaged or simply worn out it goes against rental income. If its an improvement it goes against capital.

So if you've redecorated the cost goes against income, if you add a conservatory it goes against capital.

Of course there are grey areas. Replacing rotten single glazed windows with sealed unit double glazed ones could be capital (because they're better than the old single glazed ones), or income (because they are the modern like-for-like equivalent).

I read somewhere too that the tax man has recently ruled that certain white goods are always capital even if they're replaced on a like-for-like basis because they're not part of the fabric of the building. That made no sense at all, but its what the article said and it was from a reliable source.

As Mark says it depends what rate of tax you pay, if you are on 40% then anything you can claim against that is better than claiming 28% capital gains, but if you are on a lower rate of tax then anything that can be a capital cost may be beneficial.

HMRC do have definite rules of what can be claimed against capital growth, and what can be claimed against income. For example if you replace double glazed windows with new double glazed windows that is like for like and a replacement so claimable against income, but if you replace single glazing with double that is an upgrade / improvement so is a capital cost and only claimable against CGT.

I believe any work done before the property is let for the first time is a capital cost, again only claimable against CGT not against income.

Reply to the comment left by "Steve From Leicester" at "24/10/2014 - 16:44":

We have a very similar understanding on this.

I suspect it is far easier to present replacement work as a capital improvement than it is to present a capital improvement as a replacement for income based losses. For example, a new bathroom suite could very easily be presented as either a replacement or an improvement but an extension could only ever be an improvement and capitalised.
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STEVE,
'Of course there are grey areas. Replacing rotten single glazed windows with sealed unit double glazed ones could be capital (because they’re better than the old single glazed ones), or income (because they are the modern like-for-like equivalent).'
THATS NOT CORRECT. AS ITS CONTRARY TO BUILDING REGS IT IS NOT PERMITTED TO INSTALL SINGLE GLAZING. SO AS DOUBLE GLAZING HAS TO BE USED WHEN REPLACING SINGLE GLAZING THIS IS DEEMED A REPAIR RATHER THAN AN IMPROVEMENT. ALSO CANT THINK YOU ARE RIGHT ABOUT WHITE GOODS BEING CAPITAL, BUT WOULD LOVE YOU TO PROVE ME WRONG.

Reply to the comment left by "Joe Bloggs" at "24/10/2014 - 21:43":

Hi Joe,

Stop shouting !

Yes, I believe double glazing would be classed as a "repair" for the reason you quoted, but unless you did the job to the absolute bare minimum required by building regs I suspect you'd probably get away with calling it an improvement if that suited your tax position better.

however, I did some digging. I didn't dream the bit about white goods and its actually worse than I thought - here's the comments from my accountant:

"H M Revenue & Customs have announced that the renewals allowance is no longer available, except for the strict statutory allowance for “trade tools” which is unlikely to be much help for them. The only relief available to residential landlords will be the wear and tear allowance, and this can only be claimed for fully furnished properties, so landlords of unfurnished residential accommodation will, potentially, not be able to claim any relief for replacing items such as cookers, sinks, and baths"

This took effect April 2013.

Reply to the comment left by "Steve From Leicester" at "27/10/2014 - 14:19":

hi steve,
the use of upper case was clearly to differentiate my text from yours.
glad you accept the correction.
may be an element of the cost of superior windows could be capital, but not the whole cost.
the quote does not mean that white goods are capital! al that means is the landlords can only claim the 10% allowance rather than the actual costs! time for new accountant?

Reply to the comment left by "Colin Dartnell" at "24/10/2014 - 16:55":

"I believe any work done before the property is let for the first time is a capital cost, again only claimable against CGT not against income."

This is not correct.
In general, if it is revenue after the first let, then it is revenue before the first let; similarly for capital.

However, if it was necessary to do the work to make the property habitable (e.g replace rotten windows plus related decorating), then it is capital (the hmrc view is that you paid less for the property because of the defect). It is still amatter of fact as to whether the expense is revenue or capital; if in doubt seek advice (I often talk to tax inspectors and get them to put their advice in writing to me).

Reply to the comment left by "Michael Barnes" at "27/10/2014 - 16:23":

Hi Michael,

I was commenting on Peter's particular question where he says in year one he would spend £30k on repairs which presumably was to bring the property up to letting standard.

So as you agree in your second paragraph I was correct, I have been in the position more than once where I have had to repair a property to bring it up to scratch before letting and the outcome has been capital each time, damm it !!

I was wrong with the windows, as the revenue says itself 'times have changed' which Joe Bloggs, spelt out for us. It's been a while since I have had to change single glazing to double. Teach me to spout things without checking first if the rules have changed!