Capital improvements
A capital improvement is expenditure that enhances a property beyond its existing condition, adding something new, upgrading to a materially higher standard, or substantially altering the structure, rather than simply restoring what was already there. According to HMRC's Property Income Manual (PIM2030), whether expenditure constitutes an improvement or a repair is a question of fact and degree in each case. The distinction matters because the two types of expenditure are treated differently for tax: repairs reduce rental profits in the year they are incurred; capital improvements do not, but they reduce the capital gains tax liability when the property is eventually sold.
How HMRC distinguishes improvements from repairs
HMRC's core test is whether the work restores the property to its original condition or enhances it beyond that state. A repair that uses modern materials broadly equivalent to the old ones remains a revenue expense, even if the new materials are slightly more durable or efficient. Where the replacement results in a genuinely improved standard, in function, capacity, or character, the expenditure is capital.
Examples that HMRC treats as repairs (revenue expenditure, deductible from rental income):
Replacing a broken boiler with a modern equivalent of similar specification and output
Re-roofing with contemporary materials where the roof performs the same function as before
Replacing single-glazed windows with double-glazed units, HMRC's own guidance confirms this is now treated as a repair, not a capital improvement, because double glazing has become the modern industry standard
Redecorating and routine maintenance
Examples that HMRC treats as capital improvements (not deductible from rental income):
Building an extension or adding a loft conversion
Adding a bathroom or shower room where none previously existed
Installing a central heating system where none previously existed
Replacing a standard kitchen with a significantly higher-specification layout or fitout
Structural alterations that change the character or use of a space
The boundary is not always clear. Where work is partly repair and partly improvement, for example, replacing rotted window frames while simultaneously upgrading from single to triple glazing, HMRC expects the expenditure to be apportioned. The repair element remains a revenue expense; the upgrade element is capital. Keeping separate invoices, or a written breakdown from the contractor, is the clearest way to support this apportionment.
From working with self-managing landlords across the UK, we find that the borderline cases, particularly kitchen and bathroom replacements, are where landlords most commonly misclassify expenditure. A kitchen replaced on a like-for-like basis because the units are worn is a repair. A kitchen replaced with a premium refit involving structural changes and higher-specification appliances is a capital improvement. The difference can be several thousand pounds in immediate tax relief or a corresponding CGT deduction years later.
The tax treatment of capital improvements
Capital improvement costs cannot be deducted from rental income in the year they are incurred. They are not allowable expenses against rental profits. Instead, they are added to the property's base cost, the starting figure used to calculate the chargeable gain when the property is sold. A higher base cost means a lower gain, which means less CGT. For a higher-rate taxpayer paying CGT at 24%, every £1,000 of capital improvement correctly recorded reduces the eventual tax bill by £240.
The practical implication is that record-keeping cannot wait until the point of sale. HMRC requires records to be kept for at least five years after the 31 January self-assessment filing deadline for the tax year in which the disposal occurs. For a property held for 15 years, improvement records from year one of ownership are relevant at sale. August's expense tracking lets you log and categorise capital improvement costs separately from repairs, ensuring those records are complete when it matters most.
The boundary between a capital improvement and a repair is not always clear, see the entry on repairs for how HMRC treats like-for-like replacements and the new materials rule in more detail.
Capital improvements required by regulation
Under the regulatory framework in force from 1 May 2026, many landlords face capital expenditure that is not discretionary but compliance-driven. The key obligations include:
Minimum Energy Efficiency Standards (MEES): Rental properties in England must currently hold a valid EPC rated E or above. The government has proposed raising this to C for new tenancies by 2028 and existing tenancies by 2030, though legislation has not yet been confirmed. The cost of bringing a property up to the required rating, covering cavity wall insulation, loft insulation, heat pump installation, external wall insulation, is capital expenditure. It cannot be expensed against rental income but forms part of the CGT base cost.
Awaab's Law and damp and mould: Landlords must address hazardous damp and mould within strict timeframes under the Renters' Rights Act 2025. Where remediation requires structural works, for example, installing ventilation systems or undertaking external waterproofing, those works are likely to constitute capital expenditure rather than routine repair.
Decent Homes Standard: When applied to the private rented sector, Decent Homes requirements may necessitate capital works to bring properties up to the required standard.
These are business investments, not costs that can be passed to tenants as additional charges. Attempting to recover capital improvement costs through a tenant fee would constitute a prohibited payment under the Tenant Fees Act 2019.
Landlords planning energy efficiency improvements ahead of the proposed EPC C requirement should read August's guide to EPCs for landlords. For a full guide to classifying rental property expenditure, including worked examples of borderline cases, see August's expense categorisation guide.
Frequently asked questions
Is replacing a kitchen a capital improvement or a repair?
It depends on what the work involves. Replacing worn kitchen units on a like-for-like basis, same layout, broadly equivalent specification, is a repair and is deductible from rental income. Replacing a kitchen with a materially higher specification, a different layout, or significantly better appliances constitutes a capital improvement. Where the work is mixed, costs should be apportioned between the two. Keep contractor invoices and a written description of what was done to support the classification.
Is fitting double glazing a capital improvement?
Not in most cases. HMRC's Property Income Manual confirms that replacing single-glazed windows with double glazing is now treated as a revenue repair because double glazing has become the modern industry standard. The test is whether the asset, as a whole, has been improved beyond its previous condition and the widespread adoption of double glazing means it no longer represents an enhancement.
Can I claim capital improvements against income tax each year?
No. Capital improvements are not deductible from rental profits in the year they are incurred. They are added to the property's base cost and reduce the chargeable gain for CGT purposes when the property is eventually sold. Routine repairs, by contrast, are deductible from rental income in the year they occur.
How long do I need to keep records of capital improvements?
You should keep records, including invoices, receipts, contractor quotes, before-and-after photographs, for at least five years after the 31 January filing deadline for the tax year in which you sell the property. For a long-held property, this means improvement records may need to be retained for the entire period of ownership plus five additional years.
The information on this page reflects UK tax law and HMRC guidance as of May 2026. It is provided for general guidance only and does not constitute tax advice. Landlords should seek advice from a qualified accountant for their specific circumstances.
