James Bailey explains why the new rules for replacement of furniture in residential properties are in fact a return to the position before HMRC introduced confusion in 2013.
The rules for the costs of replacements of items such as fridges, furniture, carpets, and curtains in residential property were fairly simple and well-understood until April 2013. HMRC then decided to change the rules from that date, and the result was so much chaos and annoyance that they have had to change them back again.
The good old days
Until 2013, a landlord could claim the cost of renewing furniture, white goods, carpets, curtains, and so on as an expense against the rent. The claim was reduced by anything received for the old item, and had to be adjusted if the new item was an improvement on the old – a washer-dryer instead of just a washer, for example. The original cost of the first items bought when fitting out the property was not allowed, only the cost of replacing them.
In the case of fully furnished lettings, there was an alternative in the form of the ‘wear and tear’ allowance. The landlord could claim 10% of the rent on the property, regardless of any expense actually incurred, as an allowance to cover the costs of replacing the items referred to above.
Certain items – known as fixtures – are actually part of the fabric of the property itself. Examples would be baths, toilets, boilers, and fitted kitchens. Replacing these is treated as a repair to the whole property, and this will remain the case.
Moving goalposts
In 2013 (or rather in 2012, but with effect from April 2013), HMRC announced that they had decided the renewals basis was not covered by the legislation. I think they were wrong – indeed, this is one of my favourite rants at tax conferences when the arrogance of HMRC becomes a topic (I will spare you the details, and in any case the sums involved were generally not worth getting into an argument about). HMRC announced that from April 2013, landlords could no longer claim the cost of ‘renewals’.
HMRC’s ‘abolition’ of the allowance for renewals produced a very unfair result. Landlords of fully furnished accommodation could still claim the 10% wear and tear allowance, but landlords of unfurnished or part furnished property could claim nothing at all.
This led to such an outcry that HMRC promised to ‘review’ the position – and at a local level, some of them took a more practical attitude. I am aware of cases where HMRC have let it be known that they will not look at expenditure of less than £250 on renewals, and even more bizarrely, suggested the concept of ‘repair by replacement’. As far as I understand it, this applies where the old item is so badly damaged that it cannot be repaired, so it is replaced instead. In other words, this began with HMRC’s head office making up the law in one way, and ended with local tax officers making it up again in a different way.
The proposed change will mean that, from April 2016, we will be back to the old rules for ‘renewals’ exactly as described above, and (as before) they will apply to all landlords of residential property, furnished or unfurnished. The wear and tear allowance will be abolished.
Landlords should note that none of this applies to commercial properties, or to furnished holiday accommodation, both of which have their own, different, rules.
Planning Tip:
If you are a residential property landlord, it might make sense, if possible, to postpone any replacements of furniture, TVs, carpets, curtains, and so on, until after April 2016. If you claim the wear and tear allowance, note that 2015/16 will be the last year for doing so.
