Many landlords and property investors find distinguishing between revenue and capital expenditure difficult. Correctly categorising these costs can significantly affect your tax liabilities for the 2025/26 tax year and influence how you plan for the future. This blog aims to explain both terms, show why they matter, and offer some practical insights to help you make informed decisions.
Why classification matters for the 2025/26 tax year
For property owners, the distinction between revenue and capital expenditure affects how expenses are recorded and deducted. If you treat an expense as revenue expenditure when it should be capital, or vice versa, you could face unexpected tax implications and cashflow issues. Although specific tax thresholds and rules can change from one year to the next, the principle of correct categorisation remains the same. If you have any questions about allowances, thresholds, or other figures for the 2025/26 tax year, please contact GHLD for tailored guidance.
Revenue expenditure explained
Revenue expenditure refers to the ongoing costs related to the day-to-day running and maintenance of your property. These expenses are typically deductible against rental income in the same tax year that they arise. This can reduce the amount of profit on which you pay Income Tax. Common examples of revenue expenditure may include:
- General repairs and maintenance include fixing a broken boiler or replacing guttering.
- Utility bills and insurance premiums for your rental property.
- Interest on any loans used to maintain your property business.
Because these costs are often regular and necessary to keep your property operating, it is important to note them correctly in your accounts. While official guidance from HMRC can offer more details about what qualifies as revenue expenditure, contact us if you would like personalised advice.
Capital expenditure explained
Capital expenditure is linked to improving or enhancing the property rather than maintaining its condition. These expenses are usually not deductible against rental income in the same way as revenue costs. Instead, they qualify for capital allowances or could affect your Capital Gains Tax (CGT) calculations when you sell the property. Some typical examples of capital expenditure include:
- Extensions, loft conversions, and major structural alterations.
- Installing new facilities, such as a modern kitchen or an upgraded central heating system, increases the property’s overall value.
- Significant refurbishments go beyond simple repairs and improve the property substantially.
Capital expenses are less frequent than revenue expenses but usually involve larger sums. If you are unsure whether your expense counts as capital, we are here to help you make the right classification.
Common scenarios for property owners
- Replacing a broken item: If a landlord replaces a broken boiler with a similar model, it is often treated as revenue expenditure because it is a like-for-like replacement. If the boiler is upgraded to a more advanced system that significantly improves the property, it might be classified as capital expenditure.
- Routine maintenance vs major improvement: Painting rooms periodically is usually a revenue expenditure, as it maintains the property’s condition. Adding a conservatory, however, increases the property’s value and is treated as capital expenditure.
- Repairs following damage: If a storm damages the roof and the landlord fixes it to the previous standard, it is usually considered revenue expenditure. But if, during those repairs, the landlord decides to install a better-quality roof to upgrade the property, part or all of that cost may become capital expenditure.
These scenarios are broad examples and can vary based on exact circumstances. For definitive guidance, speak to one of our advisers at GHLD.
Tax planning considerations
When you categorise your expenses correctly, you can:
- Optimise tax relief: Revenue expenses can reduce your rental profits in the relevant tax year, lowering the Income Tax amount you owe.
- Use capital allowances where possible: Certain capital expenditures can qualify for capital allowances, especially for furnished holiday lettings or commercial properties. This can spread relief over multiple years or offer other benefits if the expense meets HMRC’s criteria.
- Prepare for Capital Gains Tax: If you sell your property, the costs of certain improvements can reduce your CGT liability. Accurately recording these costs now can help you avoid scrambling for documentation later.
We encourage property owners to keep detailed records of every property-related expense and evidence of what was replaced or improved. This helps ensure that you can prove the nature of each expense if HMRC queries your calculations.
What happens if you misclassify expenses
An incorrect revenue or capital expenditure classification can affect how much tax you pay. Misclassification could lead to underpaying tax, which might result in penalties if HMRC identifies the discrepancy. On the other hand, you could overpay tax by not claiming legitimate expenses or capital allowances. This not only affects your current year’s tax return but can also impact your long-term financial plans. If you have concerns about past misclassification, we can offer guidance on how to correct your records.
Working with us
We have spent years supporting property owners who want to manage their accounts effectively. Our team at GHLD can explain how current tax rules apply to your circumstances and identify ways to optimise your tax position. We tailor our services to each client’s unique needs, whether you own one property or manage a large portfolio.
Speak to us about how to distinguish revenue vs capital expenditure and manage your accounts. Our team is happy to offer a no-obligation chat to explore your options and help you keep your property portfolio on track.
