Sarah Bradford explores the tax implications of undertaking property repairs while a let property is empty.
Landlords will generally need to undertake regular maintenance on their property. This may vary in nature, from small repairs (such as fixing a broken tap) to more extensive work (such as redecorating a property or putting on a new roof).
Where repairs are significant, it will usually be preferable to undertake them when the property is empty (e.g., between tenants or, for holiday lets, during the off-season). It is not much fun sharing your holiday home with the builders or renting a building site!
If repairs are undertaken when the property is not let, does this affect the extent to which the cost of the repairs can be deducted when calculating the profits of the rental business?
Deductibility of expenses: general rule
Expenses are deductible in computing the profits and losses for a property business if they are revenue in nature and the expenses are incurred ‘wholly and exclusively’ for the purposes of the business. If the property accounts are prepared using the cash basis (which is the default basis where rental receipts are £150,000 or less), capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.
Special rules apply to the replacement of domestic items in a residential let, under which relief is given by deduction for like-for-like replacements, but no relief is available for the initial cost. These rules do not apply to furnished holiday lettings.
Work undertaken in empty periods
Expenses are only deductible if they are incurred wholly and exclusively for the purposes of the business. Where an expense is incurred when a rental property is empty, the first question to consider is whether the business is ongoing.
Where more than one property is owned by the same person and the properties are let in the same capacity, the properties will form part of the same property rental business. For example, if a landlord had three residential properties that he lets on long-term lets and two furnished holiday lets, he would have one UK property business comprising the three residential lets and one UK furnished holiday lettings (FHLs) business comprising the two holiday lets. Each business would be ongoing as long as there was at least one property let in each business. However, individual properties may cease to be let and no longer form part of the relevant business.
There will be natural pauses in letting, for example, between tenants or holiday guests. In an FHL business, the business may be seasonal and there may be empty periods in the off-season. These natural breaks provide an ideal opportunity to undertake non-urgent maintenance work, such as internal painting to freshen the property. If the property is let once the work has been carried out, the temporary pause in letting will not normally be regarded as the cessation of a business. This will be the case even if the property business comprises a single property.
As a general rule, HMRC accepts that the business has not ceased where the property is temporarily unavailable for letting while work or alterations are undertaken. Further, where evidence can be provided that despite the property being empty the landlord has taken steps to find tenants, HMRC will normally accept that the business is ongoing.
Example 1: Ongoing rental property business
Nigel has four residential properties that he lets out on long-term lets.
Property one is empty for six weeks in 2022/23 between tenants. During this time, Nigel has the property redecorated internally and replaces the carpets. The work costs £7,000. The property is let again once the work has been completed on a six-month let to a new tenant.
The other three properties are let on long-term residential lets throughout 2022/23.
Nigel’s UK property rental business comprises all four rental properties. The business is ongoing and the expenses incurred in redecorating property one are deductible from the total rental income from all properties, together with other allowable expenses, in calculating the taxable rental profit for 2022/23. The business is ongoing and the expenses remain business expenses, despite the fact that the work was undertaken when the property was empty. They are incurred wholly and exclusively for the purposes of the business.
However, if the nature of letting is changed after the work has been carried out, the old business may have ceased and a new one started. This would be the case if a property that had been let as a holiday letting was refurbished and then let as a long-term residential letting. However, expenses incurred in the empty period may be relievable under the pre-commencement or post-cessation rules.
If the property is used privately once the work has been undertaken, and the costs relate to the private use (e.g., changing the décor for personal taste in preparation for use as a residence), a deduction is not available as the costs are not incurred for the purposes of the business.
Example 2: Moving into a former rental property
Nina has a residential property that she lets out. It is her only let property. She lives nearby but wishes to relocate to the Suffolk coast. She sells her main home but has not found a property to buy.
The tenancy on the rental property comes to an end and she has the property decorated in line with her personal taste and to complement her furniture. She moves into the property once it has been decorated and the sale of her home has been completed. She lives in the property for ten months before moving to her new home in Suffolk.
The expenses of painting the property to suit her taste are not business expenses and are not deductible in calculating the taxable rental profit.
Furnished holiday lettings and closed-season maintenance
Where the property is kept solely for letting as furnished holiday accommodation but is, in fact, closed for part of the year because there are no customers or no business, HMRC allows a deduction for all associated expenses incurred in this period if there is no private use. Consequently, where the furnished holiday let is closed during the winter, a deduction should be forthcoming for expenses incurred in this period.
However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during winter and undertaking maintenance work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.
Example 3: Holiday accommodation: maintenance in a quiet period
Nick has two holiday lets, one in a popular seaside resort and one in London. Both are let for short lets and meet the furnished holiday lettings qualifying conditions for income tax.
There are no bookings for the seaside property in February, so Nick has a new bathroom installed and the property painted internally and externally. The works cost £20,000. The costs are deductible in calculating the taxable rental profits for the holiday letting business, as the business is ongoing despite the lack of bookings for the seaside property in February.
Repairs versus improvement
Where significant work is undertaken, it is important to understand the distinction between repairs, which maintain the property, and improvements, which enhance it. Repair work includes replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement.
Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which generally cannot.
Practical tip
A temporary break in letting provides the ideal opportunity to undertake maintenance work while the property is empty without losing rental income. However, expenses incurred in this period must pass the deductibility tests to be taken into account when calculating rental profits. It is important to consider why the property is empty and whether the expenses are incurred wholly and exclusively for the purposes of the property rental business
