Residential Property letting – the removal of the tax wear and tear allowance and introduction of a new replacement furnishings relief
A key change was announced in the recent Budget and this article provides a summary of the change and what action you may want to consider.
Removal of the Wear and Tear allowance
Many businesses receive capital allowances to recognise the depreciation of equipment used in the business. However, there are no capital allowances due for equipment bought for use in a residential property.
There are exceptions to this rule for property which falls within the definition of a furnished holiday letting and expenditure on assets which are used in the non-residential part of a block of flats, for example the hallways.
Since April 2013 where a taxpayer lets a fully furnished residential property, a deduction could only be claimed for a wear and tear allowance of 10% of the ‘net rent’ from the furnished letting, designed to cover the depreciation of equipment.
Furthermore from the same date where a dwelling is let partly furnished, there are no allowances due at all unless costs are incurred on equipment and can be classified as a repair. Relief will then be given for these costs. In some cases, a repair will include the replacement of that item if that item can be regarded as a ‘fixture’ in the building.
Whether expenditure is a repair can be complex and is governed by principles established in a number of tax cases.
From April 2016 the government is proposing to remove the wear and tear allowance. A new relief will allow all residential landlords (in respect of a fully furnished dwelling or not) to deduct the actual costs of replacing furnishings provided for the tenant’s use in the residential property. The initial cost of furnishing a property will not be included.
Examples of items eligible for new relief for replacement furniture
Under the new replacement furniture relief landlords of all non-furnished holiday let residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:
- movable furniture or furnishings, such as beds or suites
- fridges and freezers
- carpets and floor-coverings
- crockery or cutlery
- beds and other furniture.
Examples of ‘fixtures’ which are eligible for relief as repair expenditure
Fixtures integral to a residential property are not normally removed by the owner if the property was sold. The replacement cost of these are, and will continue to be, a deductible expense as a repair to the property itself. Fixtures include items such as:
- fitted kitchen units.
Capital allowances will continue to apply for landlords of furnished holiday lettings.
What action can be taken to improve the position?
The wear and tear allowance is given whether or not you have replaced any furnishings. From 6 April 2016 (1 April 2016 for companies) specific relief will be given for these costs, so it makes sense, if possible, to defer replacement expenditure to after these dates.
A similar point applies if you let out a property only partly furnished. No relief is given at the moment for replacing furnishings but relief will be given for such expenditure from April 2016.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Neither Essex Abel Ltd nor the author accept any responsibility whatsoever for any action taken based upon the information included in this articles.