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Julie Butler FCA reports on a recent tax case which provides encouragement for some landlords.

Introduction

The UK landlord has perhaps always felt something of a tax victim. The Entrepreneurs' Relief (ER) lifetime limit, with an effective 10% tax rate, increases to a tantalising £5 million but let property does not generally qualify for ER, whereas in many cases, let property did qualify under the previous Business Asset Taper Relief (BATR) which also resulted in a 10% rate of Capital Gains Tax.

To make it worse for the landlord, the national press have also reported that the special tax evasion team have collected £millions in Capital Gains Tax (CGT) by constantly reviewing the Land Registry details for “buy to let” landlords who sell property. Many such landlords have often found that their mortgage payments exceed the rent received and they are so used to the Principal Private Residence relief (PPR) advantage for CGT that they do not realise that CGT is due on the sale of 'other' let property if a profit has been made.

However, there is some good news for landlords regarding a recent tax case: C Wills v HMRC TC00479.  In this case “Wills” found that where extensive repair was incurred to make a property safe it was not treated as capital for tax purposes and therefore allowed against the rental income as tax allowable – very positive.

Repairs or Capital Improvements to Let Property?

The facts are that “Wills” had income from property lettings and incurred costs repairing one of the properties and its outbuildings. HMRC argued these costs were capital in nature, “Wills” wanted to defend the fact that these were repairs.

The outbuilding, a listed building, was used in a variety of ways. Prior to the repair work carried out by “Wills”, it had been used for storage, as a games room and generally as additional living space. The outbuilding was in a very bad state of repair and as a result was becoming dangerous. In undertaking such extensive repair work as was necessary, it was sensible for the owner to modernise the interior at the same time including heating, electric power points and a water supply. After the repairs the outbuilding was used as a games room and studio as well as for storage: not hugely different to the previous use just more safe.

HMRC argued that the costs were capital because they had improved the living area available and the property could now be let for more money.

Findings

The Tribunal found that the rent before and after the renovations had changed only in line with inflation and also that the use of the space before and after the work had not fundamentally changed. The work had to be performed to some extent to make the property safe and it seemed reasonable that the extra work was performed at the same time. The costs were therefore allowable as repairs as opposed to having to be of a capital nature, thus achieving the potential for immediate Income Tax relief.

[ For further information on this case, see also Mark McLaughlin's article Property Business - Repairs - Ed. ]