Houses in Multiple Occupation (HMO)

Houses in Multiple Occupation (HMO) and multi-lets often require improvements and repair work to optimise their maximum rental yield or meet standard letting requirements. The tax treatment of those expenses could be varied, with some available to be offset against regular rental income, whilst others could be treated as capital expenses (available to be offset against the capital gains when the property is sold). However, some in the latter case could still attract capital allowances, meaning the expense could get some earlier tax relief (e.g. where the expense relates to a qualifying item in the communal area).

Recognising the type of expense could be straightforward in some cases. However, this isn’t always the case.

Generally, it is the scope of work that defines its type. For example, whether the expense is a standard or major repair or changes the item’s characteristics. 

HMRC recognise that if expenditure changes the character of the thing being repaired, it must be classified as a capital improvement and not a repair. A fair apportionment of expense between capital and revenue is possible where it meets the relevant definition. 

For example, if a property requires some work to be done before it can be let on the open market, these expenses can’t be treated as revenue expenses. Instead, you can add the expenses to the initial cost of the property acquisition and deduct it against capital gains where the property is sold later.

On the other side if you replace the carpet in the property, you may treat that as a revenue expense, but not if you are replacing it with the wooden floor.

Losses for HMOs could be offset against the income from some other rental income.