In this episode of the I Hate Numbers podcast, we explore a tax trap that affects countless landlords and property investors. Preparing a property before tenants move in brings real costs, but HMRC applies strict rules on what you can and cannot claim. We explain those rules in plain English, highlight common mistakes, and show how to protect your cash flow and stay compliant.

When Your Property Business Really Starts

Your property business officially begins on the day your first tenant moves in and rent starts. That date matters because any spending before then is treated as pre-commencement expenditure. HMRC will only allow these costs if they meet three criteria:

• The cost must be within seven years of the start date.
• The cost must not already have been claimed elsewhere.
• The cost must be allowable if incurred after the business started.

If all three conditions are met, the expense is treated as if it occurred on day one of the rental business.

Understanding Revenue vs Capital

This is the core of the tax decision. Revenue expenses repair or maintain the property without improving it. Examples include:

• Repainting
• Repairing damp
• Replacing damaged flooring with similar materials
• Fixing broken boilers like-for-like

Capital expenses improve or upgrade the property. These include:

• Extensions
• Loft conversions
• Upgrading to high-spec kitchens or bathrooms
• Structural alterations

Revenue costs reduce your rental profits now. Capital costs only reduce capital gains tax in the future.

Examples That Show the Difference

If you treat dry rot or replace rotten timbers, HMRC sees it as a repair. If you convert a loft or add an extra bathroom, that improves the property’s overall value and is treated as capital. Understanding the difference prevents costly mistakes when completing your tax return.

Why Record Keeping Matters

HMRC expects clear records: invoices, breakdowns, and evidence of work carried out. Mixed invoices are a common issue. If repairs and improvements are bundled into one amount, HMRC may block the full claim. Ask contractors for itemised invoices, and take before-and-after photos to strengthen your position.

Avoiding Common Mistakes

Landlords often run into trouble for reasons such as:

• Claiming costs older than seven years.
• Classifying improvements as repairs.
• Lacking itemised invoices or evidence.
• Using inconsistent accounting methods.

If you have multiple rental properties, allowable repair costs from one property can still reduce overall rental profits across your portfolio.

Episode Timecodes

[00:00:00] Introduction

[00:00:42] Understanding pre-letting costs

[00:01:27] When a property business starts

[00:02:00] The three tests for pre-commencement expenses

[00:03:00] Revenue vs capital explained

[00:04:12] Examples from real situations

[00:05:00] What you can and cannot deduct

[00:06:09] Record keeping and documentation

[00:07:12] Mixed invoices and challenges

[00:07:57] Accounting basis considerations

[00:08:36] Impact on portfolios and holiday lets

[00:09:18] Summary and next steps

Final Thoughts

Understanding pre-let expenditure rules helps you avoid HMRC issues and protects your cash flow. The clearer your records and the more accurate your classifications, the smoother your tax return becomes. If you want personalised support reviewing your property costs, we can help with a detailed tax diagnostic review.

Additional Links

• 📘Buy the I Hate Numbers Book
• ☎️Book a Call
• 🎥I Hate Numbers YouTube Channel

Host & Show Info

Host Name: Mahmood Reza

About the Host: Mahmood is an accountant, tax specialist, and founder of I Hate Numbers. He helps landlords and businesses stay compliant, improve tax efficiency, and build financial confidence.

Podcast Website:https://www.ihatenumbers.co.uk/i-hate-numbers-podcast/

Welcome back to another episode of I Hate Numbers. In this week's podcast, I'm going to be looking at property investment costs, more specifically, the tax relief available when you buy a place to rent out - what some people might call a buy-to-let property. Now, this is crucial for anyone taking on a new buy-to-let,

adding to their portfolio, or perhaps a charity or a small business acquiring a new operational space. Now, before those tenants move in, it's likely you're going to have to spruce the place up - fresh paint, maybe some plumbing repairs, replacing worn carpets, and these costs can be quite substantial. There's a problem here. If you spend money before the property is let out,

the question that often comes with our clients is, can you claim it? And crucially, is it a deductible repair or a non-deductible improvement? Now, if you get this wrong, you could lose out on thousands in immediate tax relief. It all hangs on timing and the clear line that HMRC draw between revenue and capital expenditure.

The first question to consider is when does your property business actually start? Let's start with the timing because timing is everything in tax. Now, if it's a new venture or even the first rental in your portfolio, you don't actually have an active property business yet, according to the tax people.

HMRC is very specific. Your property business only officially starts when the letting begins. That means the day your first tenant moves in and the rental income starts flowing. So any money you spend on refurbishment before that first tenant moves in, falls into a special category called pre-commencement expenses.

Now don't worry, these costs are not necessarily lost. HMRC allows some of these pre-commencement expenses to be claimed later, providing they meet three vital conditions. These are the three vital conditions - the list you need to remember. Now, firstly, the expense must have been incurred within seven years before your rental business officially began.

Now, that gives you plenty of time, but records, absolutely, you must have them. Secondly, the expense is not already being deducted for some other reason, which seems fair enough. And thirdly, and this is the kicker, it must have been deductible as an expense if you had incurred it after the letting had started.

Now the third point is the gateway to potential claim. If you meet the three criteria, you can treat the cost as if you'd paid it on the official start date of your rental business. This means cost like repainting a room, fixing a minor roof damage, replacing damaged kitchen units can qualify for tax relief even if you pay for the work months before you found a tenant.

In this next section, I'm going to be looking at the distinction between revenue and capital. The classification of each one has an impact on the income that you generate and the tax you pay on that rental profit and when you come to, eventually, sell that property in terms of capital taxes. Now we move to the biggest pitfall - separating revenue expenditure

from capital expenditure and the distinction is crucial. It's not just a discussion point that keeps accountants and tax advisors happy. It's critical because it dictates whether you get tax relief now against your annual rental profits or much later on down the track, perhaps when you come to sell the property.

Now, revenue costs are the costs of restoring or maintaining the property. They bring it back up to its previous standards, but they don't improve beyond that. Think of these as standard repairs and maintenance. Now, capital expenses, on the other hand, are costs that generally upgrade, improve or alter the property beyond its original state.

Now, an example here to illustrate the difference. Imagine you bought a small cottage in Cornwall (other parts of the country can suffice). It's got a few issues including a damp and a bit of dry rot in the roof timbers. You bring in a builder to treat the dry rot and replace just the affected timbers.

That is a revenue expense. You are simply restoring the property to its previous structural condition. That cost is deductible against your rental income. Now, if you make a decision to convert that damp and unused loft space into a brand new habitable extra bedroom, perhaps with a dormer window, that is going to be classified as capital. You've improved and upgraded the property, increasing its value and utility, and it's improved beyond the original standard. That cost is not immediately deductible against your rental income.

At some point in the future, when you sell that property or gift it to somebody and capital taxes become an issue, then you can make that deduction. Now, what can you deduct that's going to be classified as revenue? Well, things such as decorating, painting, superficial repairs, fixing a leaking roof, not replacing the entire roof structure, replacing a broken boiler, and it's got to be a similar modern equivalent, and general wear and tear maintenance.

On the other hand, what you cannot generally deduct immediately, which will be classified as capital are things like adding an extension or conservatory, conversion (maybe a basement or loft into a new living space), replacing an old basic bathroom with a high-end luxury fitted bathroom, and that's a clear upgrade.

Now, the crucial takeaway is that revenue costs i.e. repairs are what you want to be able to claim as pre commencement expenses. Capital costs only provide tax relief much later, reducing your potential liability to Capital Gains Tax or CGT, when you eventually sell or dispose of the property. Now, bear in mind folks, this pre-commencement is something that can also apply when you've got expenditure going on between lets. Now, what are the common mistakes and what about the wonderful topic of record keeping?

Now, the biggest error, that I see small business owners and landlords make, is failing on the paperwork. Keeping those records is what can potentially let them down. HMRC requires proof. Now, when you complete your tax return, when you make your claims here, you don't necessarily submit all the paperwork at that stage, but you need that just in case they come back and ask those questions.

If your records are messy, incomplete, all over the place, you are going to lose out on tax relief. If you are in that situation, then a digital system, something like Xero that we use for a lot of clients, a well-structured spreadsheet, having that discipline will serve you in good stead. Now, another area where mistakes can be made is the mixed invoice.

Now builders, bless them, might send an invoice for say, eight grand that covers everything - a bit of repainting, which is revenue, fitting a brand new upgraded granite kitchen, which will be capital. HMRC can reject the whole claim. You need the costs separately identified and separated. If a builder just gives you a figure representing their time and

materials, what you need to do is to make sure you get a breakdown of that. Insist on itemised invoices where the repair element is distinct from the improvement element. Now, another major oversight is not knowing the start date. If you mistakenly claim pre-commencement expenses outside of that seven year window, or if you apply the cash basis claiming when you've actually paid it incorrectly, your claim could be denied.

The short term solution and the long term solution is always discipline - discipline of mind and discipline of approach. Get dated records, keep every receipt, contractual invoice and bank statement. We supply our clients with tools where they can actually make records of that information. Store it. You don't actually need a big finding cabinet.

Take photos of the property before the work and after the work. That's excellent evidence to prove the work was simply repair and not an improvement. Now, know your basis. Now, what that means is most small landlords might use something called the cash basis i.e. the expenses are claimed when they're actually physically paid.

If that is the approach you adopt, make sure you apply it consistently. The alternative basis, by the way, the one that we tend to use for our clients is what's called the normal or the accruals basis. Now remember, if you own other rental properties, simple repair costs on a new property before it's let will all show be deductible from your overall rental income.

Now, that also includes holiday lets as well. That's going to be a real benefit for any existing portfolio or owners. Now, what's our conclusion? What's our next steps? Well, let's recap the essentials, first of all. If you are preparing a property for letting, firstly, keep those pre-commencement expenses documented.

Ensure they meet the three tests especially that they are revenue repairs. Capital improvements are not deductible against your annual rental profits. They are claimable in the future when you come to dispose of that property. Your official start date for tax purposes is the date the first letting begins.

Now dealing with property tax, dealing with tax in general can feel like navigating a minefield, but it doesn't have to be. Organising, getting your pre-letting costs classified correctly is the first major step to reducing your tax bill and improving your cash flow and your bank balance. Don't leave potential savings on the table or risk a costly audit from HMRC because you confused a repair with an improvement.

The call to action is quite clear to me, book a tax diagnostic review session with us. We'll go through your specific costs, your invoices, your timelines to make sure you're claiming what you should be doing. Check out the link in the show notes. Now, folks, I hope you found this episode useful.

Obviously, I'd love you to not only subscribe, but perhaps share, but more importantly, leave us a review. It helps get the message out to a wider audience. Until next time, plan it, do it and profit.