The government has released details of the new tax allowance for landlords who furnish their residential properties. It replaces the old wear and tear allowance, but how does it differ and how should you plan for its introduction?
Current wear and tear allowance
If you’re a landlord of residential accommodation which you let furnished you’ll already know that you can claim a tax deduction for wear and tear of equipment and furniture you include with the property. The deduction is broadly equal to 10% of the rent you charge, i.e. it has no link to the cost of the items. In December 2015 HMRC confirmed that from 6 April 2016 (1 April for companies) this so-called wear and tear allowance will be replaced with a renewals allowance.
Transition to the new allowance
The amount of wear and tear allowance is linked to rental income receivable, whereas the renewals allowance depends on costs incurred. Because the calculation methods fundamentally differ, most tax experts thought that special rules would be needed to avoid some landlords losing out while others gained a tax advantage in the transition period. However, HMRC wants to keep it simple and says there will be no transitional rules. The renewals allowance will simply take effect for 2016/17 and later years.
How will it work?
Unlike the wear and tear allowance, which only applies to fully furnished property, the new tax deduction can be claimed by any landlord who includes one or more items of furniture or equipment in a property. It will apply to any item which doesn’t become part of the structure of the building. HMRC says it will issue detailed guidance on this, presumably by April 2016. This should, for example, confirm that the renewals allowance will apply to free-standing kitchen units, but not fitted ones. However, a tax deduction for replacement fitted units should be claimable as a repair cost under the normal rules for working out rental profit.
Purchases – new and existing lets
As the name suggests, the renewals allowance will only be given for the cost of replacing an existing item. Where you let a property for the first time on or after 6 April 2016 and buy furnishings for it, you won’t be entitled to the allowance. Conversely, if you purchase a replacement item which you’ve used in a property let before or after 6 April 2016 you can claim the allowance.
Tip. If you already let a fully furnished residential property you’ll be entitled to the wear and tear allowance as usual up to 5 April 2016 (31 March for companies). Because buying
replacement furniture etc. before then won’t get you extra allowances, leave the purchase until after 5 April (31 March) as it will then qualify for the renewals allowance.
Selling furnishings and equipment
Where you sell furniture etc. which you replace, the amount of renewals allowance you can claim for the cost of the new item is reduced by the amount you receive for the old item. Also if you incur capital costs in selling an item, say auctioneer’s charges, these can be added to the cost of the replacement furniture etc.
Tip. If you sell an item, which you don’t replace, the amount you receive for it is not taxable and does not have to be declared as part of your income from the rental business.
In April 2016 the wear and tear allowance for landlords who let fully furnished residential property will be abolished. Instead all landlords who provide any amount of furniture or equipment will be entitled to claim a tax deduction for the cost. Maximise your tax deductions by leaving purchases until April 2016.