Capital expenditure is money spent on purchasing major items or making structural improvements to a property. This type of expenditure cannot be written off against your property income until the dwelling is sold. On the contrary, revenue costs are related to expenses incurred in maintaining and running the day-to-day activities of the rental property or business. These costs can typically be deducted from your profit when filing taxes. However, some cases can be more complicated, so it would be wise to consult a professional for further guidance.
When engaging in a property purchase or sale, capital expenditure is an expense that involves making significant changes or upgrades to the property. Examples of capital expenditure include adding an extension, loft conversion, lifting out a new en-suite, or significantly upgrading the kitchen. These types of expenses cannot be listed as deductions on a tax return but can be deducted when the property is sold.
Revenue expenditure occurs when an individual or business invests money into repairs and maintenance that keeps the property in the same condition it was previously. An example of this would be painting rooms, replacing existing carpets, or putting in a new kitchen that is comparable with what existed before. Be aware of those grey areas of expenditure though.
A grey area of expenditure is when you are unsure if the money should be classified as capital or revenue. A common example is buying furniture for a property where previously there was none, or replacing an existing appliance with a different one. In these cases, it can be difficult to determine whether the purchase is replacing like for like and should qualify as revenue or is providing an improvement and should be classed as capital expenditure.
Another such example is replacement windows. Generally speaking, replacing rotten wooden windows with UPVC ones can be seen as an improvement, making it a capital expense. However, HMRC has considered that using UPVC for windows to be standard for most properties now and so, if you’re simply replacing wooden frames with UPVC frames, then this would technically come under revenue spending rather than capital.