I’m selling a rental property and trying to work out my allowable expenses in an effort to reduce the capital gains tax. Can you help?
A Which? Money member
‘Know the difference between maintenance and income’
Mike Croxford, Which? Money expert, says…
HMRC distinguishes between maintenance, which can be set against the income from rent to reduce income tax, and improvement, which, as a ‘capital expense’, can be set against capital gains.
Improvement typically involves adding something to a property that it has never had before, such as an en-suite shower room.
Adding square footage, such as an extension, certainly counts as improvement, as does changing the internal layout of the walls – for example, knocking two rooms in to one to make a larger living space or bigger kitchen.
‘A possible grey area is maintenance work that upgrades the property’
Maintenance is replacing or repairing. So even the major expense of a new roof is maintenance as you would be replacing a roof that was already there.
A possible grey area is maintenance work that upgrades the property.
For example, if the kitchen now has marble worktops and high-spec fittings then you could claim this is an improvement, rather than maintenance. HMRC would look at this on a case-by-case basis.
Finally, some legal costs can also be set against capital gains.
If you have spent money on renewing or extending a lease then this counts. The rules also say any expenditure wholly and exclusively incurred in establishing, preserving or defending the title are allowable.
This could be the costs involved with a very old property that needs to be added to the Land Registry for the first time, or if you have had a boundary dispute with a neighbour and have associated legal costs.
- Find out more: Capital gains tax on property
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