Meg Saksida considers potentially allowable costs of furnishing a buy-to-let property for the owner.
Setting up a residential dwelling for rental can be a costly exercise. Even if the property is not let furnished, there are some items that must nevertheless be provided.
For example, by law a landlord must provide light fittings, and these must include light bulbs that work, and the whole unit must be regularly checked by a professional electrician. Legally, landlords do not have to provide other soft furnishings such as window covers, including curtains and/or blinds. These do, however, tend to either be provided by landlords or, due to their made-to-measure nature, be left by the vendors when the buy-to-let is purchased and, as such, become a default provision by the landlord. Electrical appliances (e.g., ovens, hobs and refrigerators) are not mandatory to be provided by landlords in an unfurnished property, but tend to be provided as a minimum.
If the property is let furnished, there are so many more items to provide. For a start, the oven and hob, not required in the unfurnished property above, are by law required to be provided in a furnished property. In addition, furniture from sofas to dining tables, beds and other appliances and white goods will need to be provided.
But which (if any) of these items can have their cost deducted for income tax purposes? Sadly, the answer is none of them, at least initially.
Original purchase of the property and contents
When the property is first purchased, the cost of the dwelling is a capital cost. This means that it is tax deductible, but not against income tax; it is tax deductible for capital gains tax (CGT) purposes. When the property is eventually sold, CGT will be calculated as the eventual proceeds less the historical cost. Any increase in the historical cost is the chargeable gain which, after the annual exempt amount, is taxed at 18% or 28%, depending on the financial situation of the seller.
If costs need to be incurred to bring the property up to a standard such that it can be let out, these too will be classified as capital costs and cannot be deducted from the rental income. For example, if a house is purchased with a broken front door that does not shut, the house cannot be let until the door is mended. Fixing the door is the cost of restoring the property to a state where it is habitable, which is a capital cost. However, if the front door can be closed and locked but simply requires a coat of paint, this is a renovation. The cost of repainting the door can be offset against rental income.
The initial purchase of the furniture and fittings to be provided in a property rented out to tenants is also not available for offset against rental income. This is deemed to be the capital cost of setting up your property business and cannot be offset against the ongoing rental income of the business. Capital allowances are also not available on furniture or any other items furnishing a residential let property, so the only place the initial furniture purchase could get any tax relief would be through CGT. However, because the furniture is a ‘chattel’ (i.e., tangible moveable property) and is likely to have been purchased and sold for under £6,000, it is likely to be exempt from CGT too.
The answer then, which allows a modicum of relief for these furniture items provided, is ‘replacement of domestic items relief’. This relief allows domestic items, which are capital in nature, to be offset against property rental income. Domestic items cover all the usual types of furniture and appliances that one would expect to see in a let property, including beds, sofas and chairs, tables, carpets, crockery and cutlery, curtains, fridges, washing machines, dishwashers and dryers etc. It does not include fixtures such as boilers, baths, basins, WCs and radiators, as these are deemed to be a part of the house. However, the relief allows a tax deduction for an item of furniture provided in a dwelling when it is replaced only.
Conditions for relief
The relief is only available for normal residential property letting businesses, whether their profits are taxed on the cash or the accruals basis. It is not available for furnished holiday lettings (which have a completely different tax regime), nor for rentals of rooms that are let through the rent-a-room scheme. There are also a number of conditions:
(1) The item which the replacement article is substituting must be no longer available for use.
For example, a sofa could not be replaced with a new sofa, and then the old sofa used in a different room. The old sofa would have to be removed from the property entirely.
(2) The replacement domestic item needs to be substantially the same as the old domestic item on a like-for-like basis. This includes the type of asset, the functionality and the price.
For example, the replacement of a £400 freezer with a £420 freezer would likely be acceptable if the features, size and mode of operation were similar. By contrast, the replacement of the same freezer with a £750 model with several extra functions and a larger capacity could not be offset in its entirety. The landlord would, in this case, need to establish the approximate price of the replacement of the same or a similar model as the replaced asset (the new similar freezer was £420) and then deduct this amount for replacement of domestic item relief purposes. The remaining £330 (the fancy model purchased for £750, less the similar freezer for £420) would not be deductible against income tax.
(3) The landlord must deduct from the replacement cost available for offset, any proceeds that were received from the disposal of the previous asset, net of any incidental costs of making the disposal.
In the example given above, if the old freezer was sold on an online auction site for £100, and it cost the landlord £15 to deliver it to the purchaser, the amount of the deduction allowed for the replacement of the freezer would be £335, i.e., £420 (the cost of the new freezer) less £85 (the net proceeds of the old freezer, being £100 proceeds less £15 incidental expenses of sale). If the item is part-exchanged, the value of the old item is deducted from the cost of the new item, and only the net amount is allowed to be deducted.
Other deductions
Replacement of domestic items relief does not impact the landlord’s ability to deduct other items from their rental income. If the property requires work which increases the capital value of the property, this will be a capital expense and offset, as explained above, in the capital gains calculation when the dwelling is eventually sold.
However, repairs of any of the fittings, fixtures or furniture are all fully deductible against rental income. In addition, landlords can offset interest payments (only deductible at basic rate), office expenses, travel costs (e.g., petrol, parking and taxis), phone and broadband costs, marketing and letting agents’ fees, accountant and solicitor fees, the costs of surveyors, buildings and contents insurances and rental income protection. Other costs, such as gardening, cleaning in-between lets, decorating, council tax, and in some cases, utility bills, are also deductible against income.
Practical tip
Some items can still be offset in full against rental income even if they are more expensive or advanced and have more features or better functionality. Items that are subject to constant or fast changes in technology, such as electronic items, will not be capped if the replacement constitutes a reasonable modern equivalent. For example, it may be acceptable to replace an old television with DVD technology with a same-sized modern television with 4k streaming enabled.
