HMRC has withdrawn the Renewals Allowance which allowed landlords of fully furnished residential properties to claim tax relief when replacing some fixtures and fittings within a rental property. These included assets such as baths, sinks, fridges and freezers.
Previously there were two ways for landlords of fully furnished properties to claim tax relief on their assets:
Although the initial cost of an asset was not eligible for this allowance, a sum for the replacement of items such as cookers, televisions and beds could be claimed. The Renewals Allowance worked by deducting the proceeds of sale from the original asset, along with the cost of any improvements to the new one.
Wear and Tear Allowance
This is still in effect, and allows landlords to claim 10% of the net amount of rent they receive from their tenants.
How has the legislation changed?
The legislation changed in April 2013, since when residential landlords of fully furnished properties can no longer claim the Renewals Allowance. This means that when they need to buy new furniture or kitchen equipment, for example, they are not entitled to claim a deduction.
Landlords can still claim the Wear and Tear Allowance, however, but this is only available for fully furnished properties. The change in legislation has hit landlords of unfurnished properties particularly hard, as they are not now able to make a deduction when buying new furniture or other assets for their properties. The only expenditure allowable for landlords of unfurnished and partly furnished properties is the amount spent on repairs.
Furnished properties that are let out for holidays only are viewed differently by HMRC. Landlords of these types of property are seen as carrying on a trade, and as such can claim capital allowances on their assets. Because of this the Wear and Tear Allowance is not applicable to them.
What the Wear and Tear Allowance is (and isn’t)
The allowance recognises the depreciation of assets within a residential letting and provides a degree of tax relief for landlords. It does not cover the capital expenditure of buying a property, or any improvement costs though. Nor does it cover commercial lettings such as offices, where a different type of claim known as capital allowances can be made.
How the Wear and Tear Allowance is calculated
Applying to fully furnished properties only, the allowance is calculated as 10% of the net rent received by the landlord. ‘Net rent’ means the figure following the deduction of expenses charged to the tenant, but actually paid by the landlord. These deductions might include water rates and council tax.
What constitutes a ‘fully furnished’ property?
This is an essential definition, as landlords of unfurnished or partly furnished properties are not eligible to claim Wear and Tear allowance. In practical terms, ‘fully furnished’ means that a tenant could move into the property and not have to worry about fixtures, fittings, chairs and tables; even items such as crockery would already be provided for them.
What is covered by the Wear and Tear Allowance?
Items would include, but are not limited to the following:
- White goods
- Sofas and other portable furniture
- TVs and associated recording equipment
- Beds and other bedroom furniture, such as wardrobes
- Curtains and bedding
- Carpets and other floor coverings
The cost of these items is not an issue, so it does not matter how much or how little has been spent on purchasing them. The fact that they are provided within the property means that the allowance comes into force, and landlords simply make a 10% deduction from their figure for net rent.
What the allowance does not cover
Items integral to a property are not covered. This means items that would not normally be removed from a building when it is sold or vacated. They could include but are not limited to:
- Bathroom goods
- Central heating systems
- Fitted kitchen cupboards
- Electrical systems
- Intruder alarm systems
- Wall-mounted ovens
The initial cost of installing a bathroom or kitchen, for example, would not be covered by the Wear and Tear Allowance. Nor would the additional costs of a significant upgrade of fixtures and fittings within these rooms. Like-with-like costs are eligible under the rules of the allowance, but radically more expensive upgrades are not.
Is it worthwhile furnishing a property just to be able to claim this allowance?
There is now little choice for residential landlords when it comes to furnishing their property. If they want to be able to claim the Wear and Tear Allowance, they are going to have to fully furnish their let.
It is not all bad news though as there are some benefits. The Wear and Tear Allowance could provide a greater amount in the way of tax relief than the actual expense of furnishing a property. The allowance is easy to calculate, and a significant benefit is that it can be claimed straight away rather than having to wait until items are replaced.
Residential property letting, although not guaranteeing an income, remains a good investment option for many. If you are a residential landlord and are worried about the tax implications of your property portfolio, give Southside Accountants in Wimbledon a call on 020 8432 2969.
Whether it is a single property or a large portfolio, we can help you increase your return on investment by making it as tax efficient as possible.