New Tax Relief For Landlords: Replacement Of Domestic Items

 

Until 5 April 2016, landlords who let furnished properties were able to claim a wear and tear allowance. The legislation specifically prohibits the claiming of capital allowances on plant used within a dwelling house. Instead, the wear and tear allowance, which was set at 10% of net rents, was designed to cover the cost of replacing furnishing and fittings in the property. Net rent is the rent received from letting out the property, less any costs that are met by the landlord but which the tenant would normally pay, such as council tax.

 

It was not necessary to actually incur any expenditure on replacing items in the tax year in order to claim the allowance but, on the downside, if the actual costs exceeded the 10% allowance, relief was not available. A further downside was that the wear and tear allowance was only available to landlords who let properties furnished. To qualify as a furnished let, the property needed to have sufficient furniture, furnishings and equipment for normal residential use. Consequently, while landlords of unlet properties commonly provide some domestic items for the use by tenants, such as white goods, they could not benefit from the relief.

 

The relief was similarly denied to landlords letting furnished holiday lettings. This is because the prohibition on claiming capital allowances does not apply to furnished holiday lettings and landlords of furnished holiday lets are entitled to claim capital allowances instead.

 

Although the 10% wear and tear allowance does not apply on or after 6 April 2016, it cannot be forgotten about just yet. It remains available for the 2015/16 tax year, and landlords of furnished lets should not forget to claim it when completing their 2015/16 tax return (which must normally be filed online by 31 January 2017). The allowance must be claimed in box 36 of the property pages of the self-assessment return.

 

Savvy landlords of furnished lets would have delayed replacing domestic goods until after the end of the 2015/16 tax year where it was possible to do so, claiming the wear and tear allowance for 2015/16 and the actual costs of replacement under the new rules when the item was actually replaced.

 

Ash has an investment property which he lets out furnished. In 2015/16, the rental income received is £8,000. He does not meet any of the costs normally met by the tenant. During the 2015/16 tax year, he does not replace any domestic items in the let property.

 

Although there are no actual replacements in the tax year, Ash is able to claim the wear allowance of 10% of net rents. This is worth £800 (10% of £8,000) in 2015/16. Assuming that Ash pays tax at 40%, this will save him tax of £320. 

 

From April 2016 onwards, a new relief is available to landlords in respect of capital expenditure incurred on the replacement of domestic items, including furnishing, appliances and kitchenware. The new relief (replacement of domestic items relief) is wider than its predecessor in that its application is not restricted to furnished lettings. It is available from 6 April 2016 onwards for income tax purposes, and from 1 April 2016 onwards for corporation tax purposes.

 

The relief is available in calculating the profits of a property business which includes a `dwelling house.’ This does not have to be a house – flats, apartments etc. also qualify. Unlike the former wear and tear relief, it does not matter whether the dwelling house is let furnished or unfurnished. However, the new relief does not apply to furnished holiday lettings in respect of which capital allowances are available instead.

 

In calculating the profits of the property rental business, a deduction is given for the actual capital expenditure on replacement furniture, furnishings, appliances and kitchenware. 

 

The availability of the relief is conditional on certain conditions being met:

• the expenditure must relate to the replacement of a domestic item for use solely by the lessee in the let property;
• the old item must no longer be available;
• the expenditure is capital in nature and incurred wholly and exclusively for the purposes of the property business; 
• capital allowances are not available in respect of the expenditure; and
• rent-a-room relief has not been claimed.

The amount of the deduction is the cost of the replacement item (on a like-for-like basis), plus any incidental costs of disposing of the old item, less any amounts received in respect of the sale of the old item. The replacement item must be substantially the same as the old item. Where the replacement is superior to the old item, the deduction is limited to the cost of an equivalent replacement. 

 

In 2016/17, Ash replaces various items in the property which he lets out furnished. He replaces the sofa at a cost of £700, and the washing machine at a cost of £300. It costs him £10 to dispose of the old washing machine. He sells the old sofa on e-bay for £150.

 

In working out the profits of his property rental business for 2016/17, he is able to claim a deduction of £860 (the cost of the replacement items (£700 + £300), plus the cost of disposing of the fridge (£10), less the proceeds from the sale of the old sofa (£150)).

 

Diana lets out a property unfurnished. In 2016/17, she replaces the fridge with a fridge-freezer costing £600. Had she replaced the fridge with a similar fridge rather than a fridge-freezer, it would have cost her £400. 

 

She is able to claim a deduction for part of the cost of replacing the fridge with a new fridge-freezer. However, this is capped at £400 – the cost of a like-for-like replacement.

 

Another change which is effective from 6 April 2016 is the abolition of the relief previously available for the replacement and alteration of small tools, implements, utensils and articles used in a business. The allowance enabled landlords and businesses to deduct the cost of replacement tools in computing profits, providing immediate 100% relief for the costs. In its application to landlords, the allowance was intended to be used only for small items, such as crockery and utensils. However, the lack of availability of the wear and tear allowance or alternative reliefs for landlords of unfurnished properties meant this allowance was often used to claim relief for the replacement of domestic appliances in properties let unfurnished. This was not what the government considered to be the type of expenditure for which the legislation should allow a deduction.

 

The introduction of the new relief for replacement of domestic items provides landlords with the proper channels through which to claim relief for replacement appliances. However, the abolition of the replacement tools relief will mean that landlords will find it difficult to obtain relief for any tools, implements and utensils that do not fall within the definition of domestic items and which consequently will fall outside the ambit of the new relief.

 

The wear and tear allowance is replaced with a new allowance for the cost of replacing domestic goods in let properties from 6 April 2016. The new relief is available to landlords of unfurnished lets, as well as those who let properties furnished.