Are Home Improvements a Tax Deduction

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Are Home Improvements a Tax Deduction to help you understand why most improvements are capital in nature, and when costs may still be allowable.

This is a question I hear regularly and it often comes from people who have spent a significant amount improving their home and understandably want to know whether any of that cost can be offset against tax. From experience the confusion usually arises because home improvements feel like an investment rather than day to day spending and investments often have tax implications.

The honest answer is that most home improvements are not an immediate tax deduction. However that is not the end of the story. In certain situations home improvements can have a tax impact later and in some cases part of the cost may be deductible depending on how the property is used.

In this article I will explain how UK tax rules treat home improvements who may benefit and who will not and where people most often get caught out. I will also cover capital gains tax considerations rental properties home offices and practical advice I would give to anyone planning major work.

What HMRC considers a home improvement

For tax purposes HMRC draws a clear distinction between repairs and improvements.

A repair is work that restores something to its original condition. An improvement is work that enhances the property beyond its original state adds value or extends its useful life.

Examples of repairs include fixing a leaking roof replacing broken tiles repairing damaged plaster or repainting like for like.

Examples of improvements include building an extension converting a loft adding a new bathroom upgrading a basic kitchen to a high specification or installing central heating where none existed before.

This distinction matters because repairs and improvements are treated very differently for tax.

Are home improvements tax deductible for homeowners

If you live in the property as your main home and you are paying for improvements personally there is no income tax relief available.

You cannot deduct the cost of home improvements from your salary self employed income or other taxable income simply because you live there.

From experience this is the biggest misconception. People often assume that because they work from home or because the property helps them earn income the cost should be deductible. HMRC does not see it that way.

For owner occupiers home improvements are generally personal capital expenditure not an allowable deduction.

Home improvements and capital gains tax

Where home improvements do become relevant is capital gains tax.

If you sell a property that is not fully covered by Private Residence Relief such as a rental property a second home or a property that was previously let the cost of certain home improvements can be deducted when calculating the capital gain.

HMRC allows you to deduct capital expenditure that adds to the value of the property and is still reflected in its condition at the point of sale.

For example the cost of an extension loft conversion or permanent structural changes may be allowable as part of the CGT calculation.

Routine maintenance repairs are not deductible for CGT because they are expected to be incurred anyway.

From experience this is an area where good records can save significant tax years later.

Are home improvements deductible for landlords

For landlords the rules are more nuanced.

If you own a rental property repairs and maintenance are generally allowable against rental income. Improvements are not immediately deductible.

Replacing a broken boiler with a similar modern boiler is usually treated as a repair. Installing central heating where there was none is an improvement and not deductible against rental income.

Upgrading a kitchen on a like for like basis is usually allowable. Installing a luxury kitchen where none existed or significantly enhancing the standard is more likely to be classed as capital.

Capital improvements may be relevant for CGT when the property is sold but they do not reduce rental profit in the year they are incurred.

From experience many landlord disputes with HMRC arise from misclassifying improvements as repairs.

Home improvements and limited companies

If a limited company owns the property the same principles broadly apply but with additional complexity.

Improvements to a company owned property are capital expenditure. They are not deducted from profits in the same way as repairs.

Some improvements may qualify for capital allowances depending on the nature of the work and the assets involved such as certain fixtures or energy efficient installations.

However improvements to residential property generally have limited relief options.

If a company pays for improvements to a director’s personal home this is almost always treated as a benefit in kind and can trigger both personal tax and National Insurance.

From experience this is an area where professional advice is essential before any work is undertaken.

Home improvements and working from home

Working from home often adds another layer of confusion.

If you use part of your home for business you may be able to claim a proportion of running costs such as utilities council tax and internet.

However capital improvements to your home are rarely deductible simply because you work there.

For example installing a new bathroom or extending your home does not become deductible just because you have a home office.

In very limited cases where a specific part of the home is used exclusively for business and improvements are solely related to that area there may be partial relief but this is rare and can affect Private Residence Relief later.

From experience claiming capital improvements for home offices is usually not worth the risk.

VAT and home improvements

VAT treatment depends on the nature of the work and the property.

Some residential building work may qualify for reduced VAT rates such as certain renovations or energy saving measures. However this is not the same as a tax deduction.

VAT on home improvements is generally not reclaimable by private individuals.

VAT registered businesses may only reclaim VAT if the cost relates wholly to business activities. Home improvements usually fail this test.

From experience VAT rules around property are complex and assumptions often lead to errors.

Common mistakes people make

The most common mistake is assuming that anything that increases the value of a home must be tax deductible.

Another is confusing repairs with improvements and claiming capital work as a revenue expense.

Some people assume that working from home changes everything. It does not.

Others fail to keep records of improvement costs and later miss out on CGT relief when selling.

In my opinion planning and record keeping are far more important than trying to be creative with claims.

Practical advice before starting home improvements

If you are planning significant home improvements I would suggest the following.

Be clear whether the property is your main residence a rental or owned by a company.

Understand the difference between repairs and improvements before claiming anything.

Keep all invoices descriptions and records of work carried out.

If the property may be sold in future retain records for CGT purposes.

Ask for advice before the work starts rather than after.

From experience the timing of advice often makes all the difference.

When home improvements can indirectly reduce tax

While improvements are not usually deductible they can still be tax efficient in other ways.

Improving a rental property may increase rental income.

Energy efficiency improvements may reduce running costs.

Capital improvements can reduce CGT when the property is sold.

These benefits are indirect but still financially meaningful.

The key takeaway

Are home improvements a tax deduction? In most cases no not in the way people hope.

However that does not mean home improvements are tax irrelevant. They can affect capital gains tax rental calculations and in some cases company tax positions.

In my opinion the key is understanding timing. Improvements rarely give immediate tax relief but they can matter later.

If you treat home improvements as a personal investment first and a tax consideration second you are less likely to be disappointed.

Good advice good records and realistic expectations are what turn property spending into sound financial decisions rather than tax headaches later on.

For more guidance on related topics, explore our Bedford Accounting Hub, which brings together practical advice for Bedford clients.