Tax Relief for Property Fit-Outs

The Challenge: Capital vs. Revenue Expenditure

Capital expenditure means costs incurred to acquire, enhance or extend the life of an asset. This expenditure is capitalised, meaning it is added to the property’s value on the balance sheet and depreciated over time.

Examples of capital expenditure include renovations that improve the property, such as installing new walls, floors or ceilings. These improvements increase the building’s value for the owner.

Generally, capital expenditure is not immediately deductible. Instead, it is depreciated over several years through capital allowances.

Revenue expenditure means costs incurred for the day-to-day running of the business, maintaining the property in its current condition.

Examples of revenue expenditure include routine repairs and maintenance such as fixing a broken window or repainting.

Revenue expenditure is typically deductible in the year it is incurred, providing immediate tax relief.

When a tenant carries out fit out works to a newly leased property, it’s easy for costs to be classified as capital expenditure on items like walls, floors, and ceilings that primarily increase the building’s value for the owner. These costs are generally non-allowable as immediate deductions from the tenant’s revenue, and must be capitalised instead.

The Solution: Make Functional Improvements

For a tenant’s works to qualify for capital allowances tax relief, focus on the functional aspects of your  fit out works:

• Walls and Partitions: If they are designed to create a specific ambiance or have a practical purpose (like soundproofing for a workspace), they may be eligible.
• Flooring: Functional features, such as anti-slip coatings or specialised finishes for operational needs, can often qualify for capital allowances.

The Key: Language and Detail Matter

Work closely with your builders and contractors to ensure the project is documented correctly. Here’s how:

1. Avoid Generic Descriptions: Terms like “walls” or “ceilings” are too broad and can lead to disallowances. Instead, detail the specific function each element serves.
2. Highlight Usability: Explain how a partition enhances the working environment or how a flooring type serves a practical purpose.
3. Collaboration: Brief your contractors on the importance of capital allowances so they know to describe construction elements in ways that highlight their functional value.

Practical Tip: Early Involvement

Engage with tax advisors or specialists early in the planning process. Their guidance can help ensure that you maximise tax relief opportunities by structuring your renovation project effectively.

In Summary: To maximise capital allowances on leased property renovations, the key is to be strategic and precise in how renovation work is described and presented. Functionality is your best friend when it comes to securing tax relief.