Repairs vs improvements
Repairs are deductible against rental income; improvements are capital and only reduce capital gains tax later. Here is how to tell the difference.
In one sentence
A repair restores something to its previous condition (deductible); an improvement makes it better than before (capital, only relievable against future gains).
Quick answer
- Repairs: deductible from rental income in the year you pay
- Improvements: capital, added to the property's cost basis for CGT
- Like-for-like replacement is usually a repair, even with a small upgrade due to modern equivalents
- Major upgrades (e.g. extensions, new kitchen with extra units) are capital
The distinction
A repair restores something to its previous condition. It is deductible from rental income in the year you pay, reducing your tax bill straight away.
An improvement makes the property better than it was. It is capital — you cannot deduct it from rental income, but you can add it to the property's cost base to reduce Capital Gains Tax when you eventually sell.
Repair examples
- Replacing broken roof tiles with similar ones
- Repainting walls in their existing colour
- Replacing a worn-out boiler with one of similar specification
- Fixing a leaking pipe
- Replacing a kitchen door that has come off its hinges
Improvement examples
- Adding an extension or loft conversion
- Installing double glazing where there was single glazing (though see below — this can be a repair due to modern equivalents)
- Fitting a new kitchen with extra units or higher specification
- Converting a single property into multiple flats
- Adding a conservatory
The "modern equivalent" rule
When you replace something with the modern equivalent — for example, replacing single-glazed windows with double-glazed because single-glazed are no longer made — HMRC will usually treat that as a repair, not an improvement, even though the new windows are technically better.
The test is whether the replacement is functionally equivalent in modern terms. A like-for-like boiler swap is a repair even if the new model is more efficient.
Why it matters
Misclassifying improvements as repairs is one of the most common reasons HMRC opens an enquiry into a landlord's tax return. Get it wrong and you may face penalties as well as the back tax.
Keep contractor invoices that describe the work in detail. "Repair to leaking shower" is a repair; "fitted new bathroom suite" is more likely an improvement.
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