Capital vs revenue: the landlord expense decision that costs the most

No single judgment in a property accounts file moves more tax than the capital/revenue call. Get it wrong towards revenue and HMRC disallows the deduction, charges interest, and may open enquiries on prior years. Get it wrong towards capital and the client overpays — sometimes by thousands — while the cost sits dormant in a base-cost note that may never be used. This guide is a working framework for staff categorising landlord transactions: the statutory test, the manual paragraphs HMRC officers actually cite, and the awkward cases that come up in practice.

The statutory and case-law backbone

Property income for individuals is taxed by reference to the trading income rules. ITTOIA 2005 s272 applies the wholly-and-exclusively test, and with it the body of case law that draws the capital/revenue line for traders. HMRC’s starting point for landlord expenses is PIM2025 (capital vs revenue), which routes the reader back into the general principles set out at BIM35100 onwards and the specific repairs guidance at BIM46900 onwards.

The working principle that flows from the manuals and the cases:

• Restoration of the asset to its previous condition is a repair — a revenue expense, deductible against rental profit in the period incurred.
• Improvement beyond the asset’s original specification is capital — not deductible against income, but added to the property’s base cost for CGT when it is eventually sold.

Two cases set the boundary. In Law Shipping Co Ltd v IRC (1923), a ship was bought in unseaworthy condition and immediately overhauled to be made usable; the cost was held to be capital because the work was part of bringing the asset into a state fit to earn income. In Odeon Associated Theatres Ltd v Jones (1971), by contrast, a cinema company bought wartime-damaged cinemas it could and did trade from, then spent on repairs over subsequent years; the expenditure was revenue because the asset had already been brought into use and the works restored — rather than created — earning capacity. Law Shipping and Odeon, between them, decide most of the awkward landlord cases. The deciding fact is almost always whether the asset was already in productive use when the work was done.

The everyday calls

Like-for-like kitchen replacement — revenue

A tenant-grade fitted kitchen in a buy-to-let is twenty years old. The landlord rips it out and installs a new fitted kitchen of broadly equivalent specification: same number of units, same tier of appliances, similar worktop. The whole cost — units, installation, plumbing, electrics, tiling, flooring associated with the work — is a revenue repair. PIM2025accepts this explicitly: replacing a kitchen with a modern equivalent of the same standard is the renewal of a subsidiary part of the building (the building being the entirety), not the creation of something new.

The line moves if the new kitchen is materially better. A move from laminate worktops and a basic electric oven to granite, induction, integrated wine fridge and a kitchen island where there was none, in a property let at the same rent to the same tenant profile, will look like improvement. In practice the inspector tests it against the rental evidence: if the property has been repositioned upmarket, the spend is capital; if the works simply preserved the unit’s lettability, it is revenue. Document the “like-for-like” conclusion on file — photographs of the old fittings and a copy of the new spec are the cheapest evidence to gather.

Single-glazed to double-glazed windows — revenue

Twenty years ago HMRC argued that fitting double-glazing in place of single-glazed windows was an improvement and therefore capital. Modern practice — set out in PIM2025 and confirmed atBIM46925 — accepts that double-glazing is now the standard specification for a residential property, and a like-for-like replacement in modern materials is a revenue repair. The same logic applies to most modernising works where the “old” specification is no longer available or no longer normal: rewiring an older property to current regulations, replacing a back boiler with a combi boiler of equivalent capacity, swapping a single-skin garage door for an insulated equivalent. The test is not whether the new item is technically better than the old; it is whether the new item is the contemporary equivalent.

Extending the property or converting the loft — capital

Anything that adds floor area, an extra bathroom, an extra bedroom, or otherwise enlarges the asset is capital expenditure. A loft conversion that turns a three-bed into a four-bed; a single-storey extension adding a utility room; converting a garage into habitable space; adding an en suite to a bedroom that did not have one — these fail PIM2025 because they go beyond restoring the asset. The spend goes into the property’s base cost for CGT. There is no income-tax deduction.

In a mixed project — a loft conversion combined with general redecoration throughout the rest of the house — apportion. The loft works (including the share of architect’s fees, building control fees and any structural works) are capital. The unrelated redecoration of unaffected rooms is revenue, on its own facts. Keep the builder’s itemised invoice; a single “refurbishment” line is an invitation to an enquiry.

Initial works to make a newly-acquired property lettable — capital

This is the single most frequently mis-categorised item in first-let landlord files, and it falls directly under Law Shipping. Where a property is purchased in a state that is not lettable, and works are required to bring it into a lettable condition, those works are capital — even if, on their own, each item (replacing a boiler, fixing a roof, redecorating) would have been a revenue repair on a property already in use. PIM2030 spells this out. The dispositive question HMRC asks is: was the purchase price reduced because of the condition? A discount against comparable properties is strong evidence that the works were part of bringing the asset into use, and therefore capital.

Where a landlord buys a property that is already let, or already in habitable order, and then carries out routine decoration or minor repairs before the first new tenancy, that spend is revenue — the asset was already income-earning when acquired. The pivot is the condition at acquisition, not the timing relative to first letting.

A worked example

A landlord buys a tired three-bedroom terrace in November 2025 for £180,000 — about £25,000 below comparable refurbished stock on the same street. Before letting, she spends:

• £8,200 on a new kitchen of broadly equivalent spec to the existing one;
• £4,500 replacing single-glazed sash windows with double-glazed sash equivalents;
• £3,800 on a new combi boiler, replacing a failed back boiler;
• £6,500 on a loft conversion adding a fourth bedroom and en suite;
• £1,900 on redecoration throughout (paint, flooring in two rooms).

On the face of it three of these items — kitchen, windows, boiler — look like routine revenue repairs. But because the property was bought at a clear discount and was not lettable at acquisition, Law Shipping and PIM2030 push the pre-letting works into capital. The £6,500 loft conversion is plainly capital in any case (enlargement). The £1,900 of redecoration on top of capital-categorised works to bring the property into use is also capital, as part of the first-let preparation.

The whole £24,900 lands in the CGT base cost: future disposal proceeds will be measured against £204,900 rather than £180,000. None of it is deductible against 2025/26 or 2026/27 rental profit. If the file had been written up the other way — kitchen, windows, boiler and decoration as revenue — the immediate income-tax saving at a 40% marginal rate would be £7,360, with the cost recovered later if and only if the property is sold at a gain. That is the size of the mistake, on one transaction.

Practical guidance for staff categorising landlord files

• Establish condition at acquisition first. Before classifying any pre-letting expenditure, get the client’s answer (with documentary support) on whether the property was lettable at purchase and whether the price reflected its condition.
• Push back on lump-sum invoices. A single “refurbishment” line on a builder’s invoice is the most common cause of the wrong call. Ask for the itemisation; the line items themselves usually contain enough information to allocate.
• Document the like-for-like conclusion. Where the call is “replacement of subsidiary part with modern equivalent”, note it on the file with a one-line justification and (if possible) photographs.
• Where works span both, apportion explicitly. A combined loft conversion + general decoration project should produce two figures on the working papers, with a defensible basis for the split.
• Capital items are not lost. They go onto the property’s base cost. Keep a running CGT cost schedule for every let property on file from acquisition; it is much easier to build year by year than to reconstruct on disposal.

For the broader expense framework — what is allowable at all, before the capital question even arises — see our companion guide on landlord allowable expenses. For the separate finance-cost rules that override the normal wholly-and-exclusively test for residential mortgage interest, see Section 24 explained.