No more wear and tear
Landlords of residential property may justifiably be feeling somewhat hard done by right now.
If the restriction to tax relief for interest and other finance costs coming in from 6 April 2017 was not enough, the government is also going to reform how individual and corporate landlords account for the costs incurred in improving and maintaining their properties. The change is set to start from 6 April 2016 (1 April 2016 for companies), although it is currently subject to consultation. The proposal is to replace the wear and tear allowance for furnishings with a new replacement furniture relief. This new relief is similar to the renewals basis which was available until 2013.
The wear and tear allowance is 10% of the rent received, although the rental figure is reduced for any costs that would normally be borne by the tenant but paid by the landlord.
For the deduction to be available, a property must be furnished to a level that a tenant could move in and live without having to provide anything apart from their food and clothing.
The wear and tear allowance therefore has several inconsistencies:
- If a property is let partly furnished, the allowance is not available.
- It is given regardless of whether any expenditure is actually incurred.
- The higher the level of rental income, the higher the allowance. So similar properties in different parts of the country attract different levels of allowance, although the landlords incur the same expenditure.
Under the new rules, with replacement furniture relief, landlords will only be able to deduct the costs actually incurred on replacing furnishings – the initial cost of furnishings does not qualify for relief. However, it will not be necessary for a property to be fully furnished.
Landlords will be able to claim a deduction for the cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use, such as:
- Movable furniture or furnishings, such as beds or suites
- Fridges and freezers
- Carpets and floor coverings
- Crockery or cutlery
There are a couple of restrictions to the amount that can be claimed.
Firstly, relief is reduced by any proceeds from selling the old asset that is being replaced.
Secondly, relief is not given for any cost that represents an improvement. For example, if a washing machine is replaced with a washer-dryer, only the cost of an equivalent washing machine will be allowed rather than the cost of the washer-dryer.
The relief does not cover the replacement of fixtures that are integral to a property. This is because these are already allowed under the existing property repair rules, which cover such items as baths, washbasins, toilets, boilers and fitted kitchen units. Furnished holiday lettings are also unaffected because they receive relief through the capital allowances regime.
If you are renting out partly-furnished property, the new relief will definitely be beneficial for you. However, following the removal of the renewals basis, some landlords of partly-furnished property will have moved to a full-furniture basis and they will probably now not be able to fully recover the costs involved with this. If you are planning to refurbish a rental property in the near future, it could pay you to wait until the expenditure qualifies for replacement furniture relief from April 2016.
If you let property that qualifies under the furnished holiday letting rules, in future you will need to be more careful than ever in ensuring the property continues to qualify. Otherwise you will find yourself subject to the restrictions that are being introduced for normal residential lettings.
We are here to advise you, contact us on:
Telephone: 020 7376 9333