When you run a property business, some costs you can deduct immediately against your rental income, while others called capital expenditure, you cannot. Capital expenditure means spending money to acquire, create, or significantly improve assets that have lasting value in your property business, as opposed to day-to-day costs of running and maintaining your properties.
Understanding this distinction is fundamental to working out your taxable rental profit. It determines how much tax you pay, when you get relief for your spending, and what claims you can make. This guide explains how HMRC treats capital costs in property businesses and what relief might be available.
Common Examples of Capital Allowance:
Buying land and buildings
Erecting new buildings after you've started letting
Converting a disused barn into a holiday home
Refurbishing property bought in a derelict state
Building a car park next to a let property
Creating a new access road
Buying additional land adjacent to existing property
The common thread is that these costs create something new, add to what exists, or fundamentally change the nature of the asset.
Why Are Capital Costs Not Deducted From Rental Profits?
When you calculate your property business profit, you cannot deduct capital expenditure. This prohibition covers the initial cost of buying, altering, building, installing, or improving fixed assets. You also cannot deduct depreciation of any capital asset or any loss when you sell one.
The reason is how the tax system treats capital and revenue differently.
Revenue expenditure, your ongoing costs of earning rental income can be deducted in the year you incur it.
Capital expenditure represents creating or enhancing lasting assets, and the tax system deals with this separately, either through capital allowances or not at all.
This means if you spend money on building works that improve rather than merely repair your property, that cost doesn't reduce your taxable rental profit for the year. Instead, you may be able to claim capital allowances on certain elements, or you may get no immediate tax relief at all.
While capital expenditure generally can't be deducted as an ordinary expense, understanding the boundary between repairs and improvements is crucial because repairs are deductible.
How Does HMRC Distinguish Repairs From Capital Improvements?
Whether work counts as a repair (deductible) or an improvement (not deductible) is fundamental to claiming property expenses correctly. The basic test is straightforward: repairs restore something to its previous condition, while improvements create something better or enhance the property beyond simple restoration.
Modern materials don't automatically mean it's an improvement
Using modern equivalent materials such as steel beams replacing wooden ones, or copper pipes replacing lead generally still counts as a repair, provided the function stays the same. However, extensive alterations that amount to reconstruction, or upgrades that increase the property's capacity or specification, are treated as capital improvements.
Watch out if you bought a property in poor condition
Repairs to property bought in a dilapidated state may be treated as capital expenditure, particularly if the purchase price reflected the poor condition or you were obliged to do the work as part of the purchase agreement.
The 'entirety' principle for repairs
A crucial concept when distinguishing repairs from improvements is the 'entirety' being repaired. For residential properties, HMRC normally treats the entire house or block of flats as the 'entirety' not individual rooms or components.
This means you can replace an entire fitted kitchen or bathroom with a modern equivalent and still claim it as a repair, provided you're replacing like-for-like rather than upgrading. The key is whether you're restoring the property to its previous working condition or creating something better.
For detailed guidance on distinguishing repairs from improvements, including specific examples and edge cases, see our complete guide: Property Business Deductions: What You Can Claim.
Special Case: Sea Walls
Sea walls protecting your property from flooding have special treatment. Revenue repairs are deductible normally. Capital expenditure on making or extending a sea wall can be written off over 21 years.
For example, spending £42,000 constructing a sea wall gives you a £2,000 deduction each year for 21 years. This relief transfers to a new owner if you sell the protected land, but only if they use it for a property business.
What Relief Is Available for Capital Expenditure?
Now that we've covered what you can't deduct, let's look at what relief might be available. There are three main avenues: capital allowances, replacement of domestic items relief, and the sea walls relief covered above.
Capital Allowances for Plant and Machinery
Capital allowances are deductions that reduce your taxable profit, but they work differently from ordinary expenses. They're available for certain types of capital expenditure, providing tax relief over time.
For property businesses, capital allowances may be available for qualifying plant and machinery. This includes:
UK property businesses
Overseas property businesses
Furnished holiday letting businesses
Plant and machinery mean items that function as apparatus for your business, not the building itself or items that become part of the structure. Examples include lifts within buildings.
Important LimitationYou cannot claim capital allowances on the cost or depreciation of residential property itself. Outside furnished holiday lettings, you cannot claim capital allowances on furniture and furnishings in residential property. Furnished holiday lettings historically qualified for plant and machinery allowances on furniture and furnishings, but these special rules cease from April 2025. |
Structures and Buildings Allowance (SBA)
For non-residential property businesses, you may be able to claim structures and buildings allowance on qualifying expenditure. This provides relief at 3% per year (meaning full relief over 33⅓ years) for capital costs on:
Non-residential buildings and structures
Renovating or converting non-residential buildings
Structural repairs and alterations to non-residential property
Important limitations:The availability of capital allowances is subject to important limitations. These allowances are only applicable to non-residential properties, such as offices, shops, warehouses, and commercial premises. They do not apply to residential properties, including furnished holiday lets. Additionally, capital allowances cannot be claimed on land acquisition costs. Furthermore, the expenditure must have been incurred on or after 29 October 2018 to qualify for relief. |
Replacement of Domestic Items Relief
For residential lettings, this relief addresses the gap left when furniture can't qualify for capital allowances. It applies from April 2016 onwards and allows a deduction for replacing not initially purchasing certain domestic items.
What qualifies: | What doesn't qualify (fixtures): |
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You cannot claim this relief for furnished holiday lettings and properties where you've claimed Rent-a-Room relief.
Four conditions must be met:
You carry on a property business letting dwelling houses
You are replacing an old domestic item with a new one for the lessee’s exclusive use, and the old item is no longer available for their use
The expenditure would be prohibited as capital but meets the wholly and exclusive rule
You haven't claimed capital allowances on the new item
How Much Can You Deduct?
Like-for-like replacements If the new item is substantially the same quality and standard as the old one, you deduct the full cost. Example: A brand-new budget washing machine costing £200 is not an improvement over a 5-year-old washing machine that cost around £200 at the time of original purchase. You can deduct the full £200. |
Upgrading to better quality If the new item represents an improvement in quality or standard, you can only deduct the cost of an item substantially the same quality/standard as the old item, not the actual amount you spent on the upgrade. Example: You replace a basic sofa with a premium leather sofa. The old sofa would cost £400 to replace with an equivalent model today, but you spend £900 on the upgrade. Your deduction is limited to £400. |
Adding incidental costs You can add incidental capital expenditure to your deduction, such as delivery charges, installation costs, and the cost of disposing of the old item. |
Deducting sale proceeds You must deduct any amount received for the old item. Example: Sell an old sofa for £100 and buy a new equivalent-quality sofa for £600 → your deduction is £500. |
Part-exchange transactions You deduct the cash you paid above the trade-in value. Example: Trade in a fridge valued at £250, pay £450 cash for a £700 fridge → your deduction is £450. |
What Gets No Relief At All?
It's important to understand that many capital costs receive no tax relief whatsoever:
The cost of buying residential property
Building or extending residential property (other than qualifying sea walls)
Most improvements to residential property
Initial furniture and furnishings (only replacements get relief)
Land acquisition costs
Capital costs you can't deduct may never generate any tax relief
What This Means In Practice?
On deductibility
Capital costs for buying property, building structures, or making improvements cannot be deducted as ordinary expenses. The capital/revenue distinction is about facts and degree using modern equivalent materials generally counts as repairs, but extensive alterations or functional upgrades are capital.
On available relief
Capital allowances may be available for plant and machinery (like lifts), but not for residential property itself or furniture in ordinary lettings
Replacement of domestic items relief covers furniture, furnishings, and appliances in residential lettings but only replacements, not initial purchases
Sea walls have special 21-year write-off rules
On timing
These reliefs reduce your taxable income but are calculated separately from everyday expenses. They're claimed for your accounting period, which is normally the tax year unless you're in a trading partnership.
Conclusion
Capital expenditure plays a key role in property businesses, as it involves spending money on assets with long-term value. Understanding the difference between capital expenditure and revenue expenses is crucial for correctly calculating taxable profits.
While capital costs can’t be deducted like regular expenses, there are relief options such as capital allowances, replacement of domestic items relief, and special rules for sea walls. By knowing these rules and available reliefs, landlords can ensure they maximise deductions and minimise their tax liabilities effectively.
