What is the difference between capital and income for property?
Answered 11 March 2026
Capital vs Income for Property: The Key Distinction
What the law says
The distinction between capital and income is not defined in statute, but it is fundamental to the UK tax system. A receipt must be of an income nature to be included in taxable profits, and a deduction must be of a revenue nature to be allowable — capital outgoings are expressly disallowed by s.33 ITTOIA 2005 (for Income Tax) and s.53 CTA 2009 (for Corporation Tax).
HMRC guidance / practice
The Core Principle: Tree vs Fruit
The classic distinction is that capital is the tree; income is the fruit of the tree. This analogy comes from case law and has been endorsed by the courts on many occasions. In Ryall v Hoare [1923], Rowlatt J put it this way:
"'Profits or gains' mean something which is in the nature of interest or fruit, as opposed to principal or tree."
The distinction turns on the facts of each case — there is no single statutory test.
Income Receipts from Property
The following are treated as income of a property business and are taxable:
- Rents and similar receipts from the exploitation of land or property
- Rentcharges, ground rents, and feu duties
- Premiums on the grant of certain leases
- Income from sporting rights (e.g. fishing/shooting permits)
- Income from allowing waste to be buried or stored on land
- Payments for allowing others to use land (e.g. film crews)
- Grants received towards revenue (i.e. running cost) expenses such as repairs
Taxable receipts include both money payments and payments in kind.
Capital Receipts from Property
Amounts received that are capital in nature (e.g. proceeds from the sale of a property) are not taxable as property income — they fall outside the property business charge and may instead be subject to Capital Gains Tax.
Capital vs Revenue Expenditure
On the expenditure side, the distinction is equally important:
- Revenue expenditure (broadly, running costs such as repairs and maintenance) is deductible in computing property business profits.
- Capital expenditure (broadly, improvements, enhancements, or the acquisition of assets) is not deductible as a business expense.
HMRC's guidance makes clear that the accounting treatment does not determine the tax treatment — for example, depreciation is charged in accounts under GAAP but is not an allowable deduction for tax purposes.
Some capital expenditure may be relieved separately through capital allowances.
Repairs vs Improvements: A Practical Application
A common area of difficulty is distinguishing repairs (revenue) from improvements (capital):
- Repairs restore an asset to its original condition → revenue, deductible
- Improvements enhance the asset beyond its original state → capital, not deductible
Where capital works and repairs are carried out at the same time, the expenditure may be apportioned on a reasonable basis, with the repair element remaining allowable.
Grants received towards capital expenditure must be deducted from the qualifying expenditure for capital allowances purposes, rather than being treated as income.
Statutory Overrides
Specific statutory provisions can override the general principles in either direction:
- Capital sums that would not ordinarily be taxable as income can be specifically brought into charge — e.g. profits from certain land transactions under ss.752–772 ITA 2007 / ss.815–833 CTA 2009.
- Conversely, deductions for capital sums are sometimes specifically allowed when they would normally be excluded.
Citation sources
Flat management companies should calculate their profits in accordance with GAAP, subject to any adjustments required or authorised by legislation. This means that any rents or other income received from tenants are generally taxable as property income. This will not be the case if the amounts received are capital (PIM2040) or for certain receipts which fall within Section 42 of the Landlord and Tenant Act 1987 (see below). Also note HMRC may treat a flat management company as dormant.
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The distinction between capital and revenue goes back to a time when all trade profits, including profits of companies, were subject to Income Tax which, in principle, charged income and nothing else. This means that to be included in trade profits, a receipt must be of an income nature and not a capital receipt. This principle is not expressly stated in the Acts, which nowhere define ‘income’, but it is fundamental to the scheme of the tax charge for both Income Tax and Corporation Tax purposes
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