You’ve received vouchers from the government’s Green Homes Grant to go towards the cost of improving the energy efficiency of your buy-to-let property. Will you have to pay tax on this?
Green Homes Grant
The government launched its Green Homes Grant scheme for homeowners (including landlords) in September 2020. As a landlord you can claim vouchers worth up to £5,000 to use towards the cost of installing energy-efficient home improvements specified under the scheme, e.g. draft exclusion and low carbon heating. The value of the vouchers can affect tax on income from letting your property.
Grants have different tax effects
Grants, including those made under the Green Homes Grant scheme, are, for tax purposes, categorised in one of two ways: as income or as capital. Where a grant is used to cover day-to-day costs (HMRC calls these “revenue costs”) such as repairs, it’s taxable. Whereas a grant used to improve your property reduces the tax deduction you would otherwise be entitled to claim for the improvement work.
Types of capital cost. A grant relating to capital either reduces the amount of tax deduction you can claim when working out the gain (or loss) when you sell or transfer the property, or the amount you can claim as a capital allowances (CAs). CAs are allowed for the purchase of equipment used in a business. However, a special rule blocks CAs if the equipment is “used in a dwelling” (unless it’s furnished holiday accommodation).
Revenue or capital?
Costs such as those for redecoration are clearly revenue. Others can count as revenue even if there’s an element of improvement. For example, HMRC accepts that replacing single-glazed windows with double-glazed is usually a repair.
Tip. The rule of thumb is that if you’re replacing like-for-like it’s a revenue expense despite any improvement resulting from better materials now being used. Conversely, for example, if you replaced the joists in a bathroom with stronger ones to cope with a particularly weighty new bath, that would be a capital expense because there’s improved functionality.
Disguised revenue costs
In 2013 HMRC changed its view on some types of expense that it previously considered capital. HMRC usually denied a tax deduction for the cost of equipment, such as a new boiler, because of the block on CAs mentioned earlier. However, it now views equipment which becomes part of the structure as a repair if it’s a like-for-like replacement. HMRC’s guidance uses the cost of replacing a boiler as an example. However, if a replacement boiler is an improvement (not just a modern equivalent of an old one), the cost of buying and installing it is capital.
Tip. Deciding what counts as a like-for-like replacement/repair and what counts as an improvement can be tricky. Again, using a boiler as an example, you might replace a conventional model with an energy-efficient one to qualify for a Green Homes Grant . As long as the energy output and other functionality is on par with the conventional one you’re replacing it would be OK to treat it as a revenue expense.
A Green Homes Grant is taxable on landlords as additional income if it’s used towards the cost of repairs. If the grant is used towards the cost of buying and installing equipment, it must be knocked off the amount of expenditure that qualifies for capital allowances. If it’s for improving the structure of the property it can increase any capital gains tax payable.
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