MICHAEL Proudfoot, Kendal-based partner at Lonsdale & Partners Chartered Accountants, has received the following question from clients which he answers in his latest article for Business Gazette...

Question: I have a buy-to-let property and have had to spend a small fortune on double-glazed windows, new beds and carpets and a fitted kitchen. Can I get tax relief on any of this?

Answer: Let's start with the double glazing, as the answer to this question has changed over the years from "partly", then to "not at all", and finally to "yes, full tax relief is available".

In the past, when you replaced single glazing with double glazing, the Inland Revenue took the view that you were to some extent improving the house rather than repairing it. For this reason, you could not offset all of the cost of the work against the rents received.

Within the last few weeks, however, the Revenue has changed its mind. It now takes the view that double glazing is merely the modern equivalent of single glazing, and that there is not necessarily an improvement element.

It is therefore prepared to give full tax relief on this type of expenditure. It will also grant refunds of tax if full relief was not given in the tax year 2000-01; claims for earlier years might also be possible, depending on the circumstances.

Incidentally, the Revenue published this change of heart in an article about rented property, but there is no reason why it should not also apply to trading businesses, rather than property businesses.

In tax, there are always exceptions to the rule. One exception applies where you buy a property that is unfit for letting in its present state, but carry out renovations to make it suitable for letting.

In this case, the expenditure on repairs will be treated as being for improvements, and will not be "offsettable" against rents received.

On the other hand, if the house is just a bit dilapidated and you are just making good arrears of normal annual maintenance, the expenditure will be allowable.

To make sure the correct treatment is given, make sure that the builder's invoices make clear the type of work that has been carried out. This will help in the event of a later Inland Revenue inquiry.

The fitted kitchen is another example of expenditure that could be treated as either repairs or improvements. Replacing kitchen units, sinks, work tops and tiling can in many cases represent an allowable expense for income tax purposes.

If, at the same time, you add new cabinets, these will be treated as improvements rather than repairs, so the overall cost will need to be split between allowable and non-allowable items. But if you are significantly upgrading the whole kitchen, the cost will not be treated as a repair, and cannot be offset against the rents.

The treatment of beds and carpets is quite different. No relief is given on these items, or any other item of furniture and equipment in a residential property, regardless of whether or not they are replacement items.

Instead, a special "wear and tear" allowance is given, calculated at 10 per cent of the rents less water rates and council tax paid by you, the landlord.

This rule is applied without regard to the amount you actually pay for the furniture in question, which means that the tax relief you receive in the early years of letting out a property is less than you will perhaps expect, although it may be balanced out in later years, when the wear and tear allowance may exceed the amount you actually spend on replacement furniture.

All of this relates to the expenditure you can offset against rents received for income tax purposes. Don't forget that when you sell the property, there may be a capital gain. The costs of any improvement expenditure will reduce the gain that is assessed to tax so, to minimise your future tax bills, do keep an ongoing record of these items.

And finally, note that the rules for holiday lets are different from those for residential lets, and the rules for commercial lets are different from both.

January 10, 2003 12:01