Unfortunately, tenants (and their pets) may cause damage to a rental property.
Where this is the case, the landlord may be left to repair the damage and pick up the bill. In this situation, can the landlord obtain tax relief for the costs incurred?
Nature of costs
The nature of the work will determine how and when tax relief is available.
Where repairing the damage merely restores the property to the state that it was in before the damage, the associated costs are revenue in nature and can be deducted in calculating the profits of the property rental business. This is the case regardless of whether the landlord prepares their accounts using the cash basis or the accruals basis.
In the event that the landlord needs to replace domestic items, such as furniture or white goods, tax relief for the cost of the replacement is given in accordance with the rules for replacement domestic items.
Under these rules, relief is given for the cost of a like-for-like replacement, plus the costs of disposing of the old item and delivery and fitting of the new one. If the replacement is superior to the old item (allowing for technological advances), the deduction is capped at the cost of an equivalent replacement. If any disposal proceeds are received in respect of the old item, this too must be taken into account.
Where the repair is so significant as to constitute an improvement, for example, a significant upgrade to a kitchen after tenant damage, the costs will be capital rather than revenue. Here, relief is given through the capital gains tax system on the disposal of the property. For residential lets, plant and machinery capital allowances are not available.
Deposit recoveries
If the landlord recovers the cost of the damage from the tenant’s deposit, the amount recovered must be taken into account as a receipt when calculating the rental profit.
Insurance receipts
Likewise, if the landlord is able to recover the costs of damage caused by tenants under an insurance policy, the insurance receipts must be taken into account.
Partner note: ITTOIA 2005, Pt. 3.
