Last updated: 14 October 2026
Is a payment to a tenant during repairs capital or revenue?
It’s usually revenue. If you pay a tenant to move out temporarily while you carry out repairs, for example covering their hotel costs or giving them a rent reduction, the payment is an allowable expense against rental income, as it’s part of the cost of the repair. If the works are capital improvements, such as an extension or conversion, the tenant payment follows the works and is capital. A payment to a tenant to give up their lease permanently, a “premium” to get vacant possession, is generally capital and added to the property’s base cost for CGT.
How different tenant payments are treated
| Payment to tenant | Treatment |
| Hotel costs while repairing a leaking roof | Revenue: deductible |
| Rent-free period during repairs | Lower rent received; no separate deduction needed |
| Compensation for disruption during repairs | Revenue: deductible |
| Payment while building an extension | Capital: CGT base cost |
| Payment to surrender the lease to sell with vacant possession | Capital |
| Payment to end a lease to re-let at a higher rent | Usually capital |
Why it matters
Revenue costs reduce your rental profit and income tax in the year you pay them. Capital costs only give relief when you sell, reducing the gain for CGT. For a higher rate landlord, a revenue deduction saves 40% now, while capital relief saves 24% later.
Example
Fatima’s tenanted flat has severe damp, and the walls need replastering and a new damp-proof course. She pays the tenants £1,200 to stay with relatives for 3 weeks and gives a £900 rent reduction. The repair works and the £1,200 are revenue costs, deducted from her rental income. The rent reduction simply lowers her rental income. The following year she pays a different tenant £5,000 to leave early so she can sell with vacant possession. That £5,000 is capital, reducing her CGT gain on sale.
Repairs versus improvements
- Replacing like for like, or with the nearest modern equivalent, is a repair
- Adding something new, such as an extra bathroom, is an improvement
- Repairs needed when you bought a property in a run-down state may be capital if the price reflected the condition
Furnished lets
Replacement furniture and appliances get replacement of domestic items relief. Tenant payments relating to replacing furniture are revenue.
Common mistakes
- Treating vacant possession payments as revenue
- Claiming a separate deduction for a rent-free period
- Capitalising genuine repair costs
- Not documenting why the tenant had to move
Records to keep
Keep the agreement with the tenant, invoices for the works and a note explaining why the tenant had to move out. This supports the revenue treatment.
Commercial property
The same principles apply to commercial landlords. Payments to a business tenant for disruption while you repair the premises are revenue, while payments to buy out a lease, or reverse premiums to attract a new tenant, have their own rules and are often capital for the landlord.
Frequently asked questions
Can I deduct a tenant’s removal costs?
If linked to repairs, yes.
What about council tax while empty?
Deductible as a property expense during repairs between lets.
Is a payment to a squatter deductible?
Usually capital if for vacant possession.
Does the tenant pay tax on the payment?
Usually not, as it’s compensation.
Related: replacing an asbestos roof, sharing rental income with a partner and inherited property profit.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with rental property expenses. See our landlord accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
