Client had a leasehold residential buy to let property. He paid a hefty premium to extend its lease term by another 70 years.
The question was whether we should treat this expense as revenue or capital.
If we took it as revenue expenses, this could be immediately deducted from the rental income and save tax immediately.
If we took it as capital expense, we will need to wait till the property is sold before we can use these expenses as a deductible expense.
Common sense guides us that any expense done to enhance the value of the property is a capital expense but in tax world many times common sense and tax laws are divergent thus we need to clarify it with a credible source.
HMRC manuals were not easily revealing the answer thus an open search on google took us to a webportal which confirmed our understanding i.e. it’s a capital expense and pointed out the HMRC manual part.
Please read the link below:
https://www.property-tax-portal.co.uk/taxquestion93.shtml
HMRC Manual reference CG71401; link
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71401
I will suggest also read CG71400: Introduction – which give a bit of background; link
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71400
