SolvedBIM43255 | Specific deductions: dilapidations under a lease: capital expenditure
From HM Revenue & Customs · Business Income Manual
Expenditure on dilapidations of a capital nature is inadmissible as a deduction (for general guidance on the capital/revenue divide see BIM35000 onwards).
Thus, even though it may be alleged that the cost of re-instatement includes an amount in respect of hypothetical repairs, no deduction is to be allowed for:
the cost of rebuilding the leased premises (see Fitzgerald v CIR [1926] IR 585), or
the cost of re-instatement of any portion of the leased premises which has been demolished by the lessee, or
the cost of the demolition of any structure which the lessee has added.
A sum paid to the lessor by way of composition to make good the cost of dilapidations is an inadmissible deduction where such cost is incurred:
by the former tenant on renewal of the lease (on the principle in MacTaggart v Strump [1925] 10TC17), or
where it is incurred by a new tenant to whom a lease of the premises has been granted in their dilapidated state (see BIM46935).