Alan Pink looks at the reliefs available for furnishing and fitting out let property.
In the case of ‘ordinary’ let property, it’s true to say that the question of whether the property is fully furnished, partly furnished, or unfurnished is of less importance now than it used to be.
Rough and ready
Until 2016, relief for the cost of furnishing let property was given, in a very rough and ready way, by the late lamented ‘wear and tear allowance’. This was originally a concession granted by the Inland Revenue as it then was (ESC B47), but as part of the process of legislating concessions which was taking place around that time, this was put into statute from 2011. Wear and tear allowance then survived as a statutory relief for just five years, until April 2016, when it was abolished and a new relief (‘replacement of domestic items relief’) was substituted for it.
Wear and tear allowance was very straightforward to calculate. Some landlords may still be mistakenly claiming it, by following on from the calculations that were done last year. You simply took 10% of the ‘net rents’ (usually, in practice, the same as the gross rents) and deducted this as a very broad brush way of accounting for the fact that it costs money to furnish property which is let as furnished lettings.
One problem which occasionally surfaced with the wear and tear allowance, though, was that the property needed to be fully furnished in order for the allowance to be given. So occasionally the Inland Revenue (latterly HMRC) would enquire into the relief and seek to disallow it if they thought that the property was not fully furnished; which means, basically, furnished sufficiently to enable ordinary occupation.
Replacement of domestic items relief
This ‘new’ relief applies to expenditure incurred on or after 6 April 2016. The basic way the relief works is to allow relief not for the initial purchase of furniture etc., but for the expenditure in replacing it.
Where a domestic item is taken out of a letting business and replaced by a new domestic item, to be used exclusively in the property concerned, the relief will apply provided the new item is capital in nature, and would not therefore be eligible for income tax relief under normal rules. This will clearly apply to items such as sofas, tables, bedframes, curtains, carpets, household appliances and kitchenware; but the relief does not apply to items which are fixtures, such as baths, wash basins and built-in furniture.
In the (comparatively rare) case of the old item fetching any money on sale, or being part exchanged, it is only the net cost of replacing the item that is allowed. Another important restriction on the relief is that the new item must not represent a significant improvement on the old. If it is an improvement in quality, you only get relief for the equivalent quality of item.
Example: Not ‘like-for-like’ quality
Alphonse has been letting a flat in a formerly unfashionable part of London for some years, when he wakes up one morning and realises that all of the other properties nearby have been ‘gentrified’. It looks as though he will be able to put his rents up, but in order to do this, he realises that the standard of the furniture needs to be drastically improved.
Out goes the battered old Ikea dining table, and in comes a mahogany product of Messrs Chippendale, costing £12,000.
In order to replace the Ikea table, though, he would have had to pay only £1,000, and therefore £11,000 of the cost of the new table is disallowed.
But what about the old rule, which gave rise to potential arguments with the taxman, that properties needed to be fully furnished? The good news is that, with replacement of domestic items relief, there is no such requirement. This could be relevant (for example) in situations where tenants bring a significant amount of their own furniture with them on the commencement of a tenancy.
Capital gains tax
Still on the subject of ‘ordinary’ lettings (as opposed to furnished holiday lettings (FHLs) which have a completely separate set of rules), one might have thought that the furniture element of a landlord’s expenditure would be quite relevant for capital gains tax on any sale of the property.
Where what is being sold is a combination of the actual bricks and mortar and the furniture within it (as sometimes happens) the furniture element of the sale will be taxed at a lower rate, or perhaps not taxed at all. Whereas the building element itself, in the case of residential property, is subject normally to a capital gains tax rate of 28%, chattels which are not worth more than £6,000 per item are exempt from the tax, and even if there are very valuable chattels which are worth more than this, the equivalent rate of tax would normally be no more than 20%.
So, in principle, if you are ‘throwing in’ items of furniture on making a sale, it can make a lot of sense to agree specifically with the purchaser what a fair apportionment of the agreed purchase price is in respect of the furniture.
Furnished holiday lettings
These are treated differently from ‘ordinary’ lettings in a number of different ways.
Very briefly, to qualify as FHL the property needs to be:
- In the UK or the European Economic Area (EEA);
- Sufficiently furnished for ‘normal occupation’;
- Let ‘commercially’ (ie with a view to profit);
- Not let for more than 31 continuous days to any one person, such that these longer lets add up to more than 155 days a year;
- Available for letting as furnished holiday accommodation for 210 days in the year;
- Be actually let for at least 105 days.
If the property qualifies as a FHL, the business or running it would be treated as a trade for tax purposes, including (particularly relevantly in terms of this article) for the purposes of giving capital allowances. So FHL businesses can claim capital allowances (rather than replacement of domestic items relief) on the furniture, including white goods, within the property.
These allowances are given under the ‘plant and machinery’ code of the capital allowances rules, and for most landlords of furnished holiday accommodation the relevant type of allowance would be the annual investment allowance (AIA). If AIA is claimed, this is a 100% write-off in the year in which the item is bought, so this relief is actually much more favourable than the replacement of domestic items relief applicable to ordinary letting, in that there is no need for the expenditure to be replacing old items, and there is no rule about the relief being restricted to a ‘like for like’ replacement.
Note, though, that the rule that used to apply in the ‘good old days’, to the effect that losses on FHLs (including losses created by accelerated capital allowances, like AIA) could be offset against a person’s other income, no longer applies. Losses of an FHL business can now only be carried forward. Indeed, the rule is even more restrictive than that, because if the same landlord has FHL in the UK and also in another country within the European Economic Area, the two are treated as separate businesses for the purposes of loss offsetting. So a loss on a UK FHL business can’t be offset against profits of an EEA holiday accommodation business, or vice versa.
Party or fully furnished?
To sum up, the situation now is that for ordinary lettings, the question of whether the property is fully furnished, partly furnished, or unfurnished, is no longer a needle question. For furnished holiday accommodation, on the other hand, it is still such a question, and none of the generous FHL reliefs will apply to a property that is only partly furnished.
