For the purpose of this blog, I will use examples of repairs and enhancements relating to residential properties as the examples will be relatable to many people and hopefully easier to understand.
What is a repair?
HMRC considers a ‘repair’ as the restoration and maintenance of pre-existing features of an asset by bringing the asset back to its original condition.
If you replace the windows in your property (as they have blown and there is condensation trapped between the two panes of glass), this is a repair as you are restoring the window to its original condition. Should you decide to replace your windows which are single-glazed with double or triple glazing, the cost of the replacement windows will be considerably more expensive than replacing them with single glazing, HMRC will still consider this as a replacement as the windows already existed and they have been replaced with a modern equivalent (double and triple glazing).
Re-roofing you Property
The roof tiles on your property have blown off in the bad weather and your roof is starting to leak so you decide to take all the tiles off your roof and re-roof your property. As the roof already existed on your property this is considered a repair as you are making the property watertight and of an expected standard.
Investing in your Garden
The garden attached to your property has a lawn and some trees with a garden shed at the end of your garden. You decide that you want to put some pebbles down and make a fairly simple garden path from the shed to your house so you do not have to walk through the grass. At the same time, you also add box hedges to either side of the path to make borders for your lawn. Although this work may make your garden look nice it is unlikely that HMRC will consider this an enhancement as they will consider this as maintaining the land as there will be insignificant value added to the property as a result of the path and the new box hedges.
Dealing with Damp and Dry Rot
The property you own has damp or dry rot which can cost a considerable amount to get fixed. As you are restoring the property back to its original condition unfortunately you cannot claim the costs of the repairs as enhancements.
What is Capital Expenditure
HMRC use ‘capital expenditure’ and ‘enhancements’ interchangeably when referring to Capital Gains. Expenditure to qualify as ‘capital’ or as an ‘enhancement’ must be expenditure which adds to, improves and enhances the value of the asset.
You decide to replace your existing kitchen with a completely new kitchen. You are increasing the number of kitchen units and you also change the worktop from a standard vinyl worktop to a marble worktop. As the number of units has increased this is an enhancement as the value of the kitchen will be increased as a result of the extra storage space made. As for the worktops, although you are replacing the kitchen worktop which pre-existed the new kitchen, you are replacing the vinyl with marble which is considered as a luxury item, and therefore this will increase the value of your property. Therefore, both the increased number of kitchen units and the new worktop will be considered as enhancement costs.
Landscaping you Property
Your property is built on a slope and as a result the garden has bad drainage. Because of this bad drainage you cannot grow any plants and the garden is a useless piece of land attached to your property. Should you decide to fully landscape your garden by levelling the land and adding drainage you are increasing the value of the land as the land goes from being fairly useless into a piece of land that can be used and enjoyed. Once this work has been completed you decide you also want to create a new patio with a permanently built in BBQ, these changes will be considered as enhancements as the value of the property will be increased.
Converting a Bungalow into a two-Storey House
You currently live in a bungalow and you want to extend the property by adding two extra bedrooms and a bathroom on a new storey of the property. The costs involved to create the new rooms will be an enhancement as you have increased the value of your property by increasing the number of rooms. When it comes to putting a new roof to your property, unlike above in repairs, the new roof will be allowable for enhancements as that roof did not exist before as it was on the bungalow and not a multi-storey property.
Extension to Existing Property
You extend your property and build a conservatory which comes off your existing kitchen. As the extension did not originally exist when you purchased the asset then this is considered an enhancement as you will be adding value to your property. However, (there is always a caveat), if you decided to lay a new floor through the kitchen and the conservatory, then the kitchen floor which already existed would be considered a repair, and the new flooring in the extension would be considered as an enhancement. The same principle would apply if you decided to paint and decorate the kitchen and conservatory, the expenses related to painting and decorating the existing kitchen will be considered a repair and the new extension will be an enhancement.
It is important to remember that if you plan to make an enhancement to your property, then 100% of the costs of the project may not always be considered as an enhancement cost as some may be repairs.
Repairs to an Enhancement
Let’s say you extended your property 5 years ago and you decided you want to add wooden flooring throughout the extension, this would now be considered a repair as you are bringing the extension back to the original condition of when it was built.
This is important to consider when are extending a property, as initially putting in cheaper features (such as windows and doors) which you plan to replace when you have saved up more money in a few year’s time, then the replacement of these features which you want to ‘upgrade’ will not be an allowable enhancement cost when you come to sell the property.
If you have any queries on any of the above and you would like a tax advisor to contact you, please email us at email@example.com.
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Written by Katy North