Sarah Bradford explains how landlords can obtain tax relief for replacement domestic items.
Where a landlord lets a property furnished, domestic items will be provided for use by the tenants. Special rules apply to determine both the timing and extent to which tax relief is available for the costs incurred in relation to the provision of domestic goods.
What counts as a domestic item?
Simply put, a domestic item is an item for domestic use. In their Property Income manual, HMRC provides the following illustrative list of items that would be classed as domestic items:
- moveable furniture such as sofas, tables and bed frames;
- furnishings such as curtains, carpets and rugs;
- household appliances such as fridges, freezers and washing machines; and
- kitchenware such as utensils, crockery and cutlery.
However, a distinction is drawn between domestic items (which qualify for relief) and fixtures (which do not). Fixtures are things like plant or machinery that is fixed to the property, such that it becomes part of it and boilers or water-filled radiators installed as part of a space heating system.
Relief on replacement - not initial provision
The key point to note is that relief is available for the replacement of domestic goods, rather than their initial provision. Thus, when the landlord first kits out the property to let it out, he is unable to claim any tax relief for the costs incurred in providing domestic items at that time. However, tax relief is available at a future date when the item is replaced for the cost of the replacement.
Thus, in the same way that a restaurant may allow free coffee refills after the first cup, the landlord must bear the cost of the item when first provided, but is able to claim tax relief for subsequent replacements.
As with all reliefs, the relief for replacement domestic items is contingent on the associated conditions being met.
The relief conditions
There are four conditions that must be met in order for relief to be given. The conditions are as follows:
Condition A
The individual or company carries on a property business which includes the letting of at least one dwelling house.
Condition B
A domestic item (the ‘old item’) has been provided for use in the dwelling house and the landlord incurs expenditure on a domestic item (the ‘new item’) which replaces the old item and is solely available for use by the tenants. Following the replacement, the old item is no longer available in the house for use by the tenants.
It is important, therefore, that the landlord disposes of the old item or removes it from the property, rather than simply leaving it for the tenants to use as a spare, as this will preclude availability of the relief.
Condition C
A deduction is not prohibited by the ‘wholly and exclusively’ rule, but would otherwise be prohibited by the capital expenditure rule.
The wholly and exclusively rule is simply the general rule governing deductibility of expenses, which denies relief for expenses not incurred wholly and exclusively for the purposes of the trade.
The appropriate capital expenditure rule depends on whether the accounts are prepared on the cash basis (which is the default basis for most landlords with rental receipts of less than £150,000) or the accruals basis.
Under the cash basis, a deduction for capital expenditure is denied for certain types of capital expenditure as specified in the legislation, while a deduction is allowed for capital items not on the prohibited list. Of relevance here is the prohibition under the cash basis rules of a deduction for expenditure incurred on the provision, alteration or disposal of a capital item for use in an ordinary residential property.
Where accounts are prepared under the accruals basis, a deduction for capital expenditure (of any type) is prohibited. The requirement that a deduction is prohibited by the appropriate capital expenditure rule ensures that relief is not given twice for the same expenditure.
Condition D
Capital allowances cannot be claimed for the expenditure on the replacement domestic item.
This again ensures that relief is not given twice for the same expenditure.
Method of giving relief
As long as the expenditure on the replacement domestic item satisfies all the above conditions, a deduction is given when computing the taxable profits for the property rental business.
Calculating the deduction
To ensure the correct deduction, it is necessary to ascertain whether the replacement is broadly of the same quality and standard as the old item (a ‘like-for-like replacement’) or whether the replacement is superior to the original and represents an improvement.
If the new item is a like-for-like replacement, the landlord can simply deduct the cost of the replacement when calculating the taxable profits for that period. Some points are worthy of note here.
In their Property Income manual, HMRC confirms that for the purposes of the relief, just because a brand new item replaces one which has been in use for several years and has suffered wear and tear does not make it an improvement. The test is essentially whether the replacement is equivalent to the old item allowing for technological advances in the interim.
To illustrate this point, HMRC states that ‘a brand new budget washing machine costing circa £500 is not an improvement over a five year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation)’.
The deduction is capped where the new item represents an improvement on the old item. This may be the case where the new item is of a superior model than the item being replaced, or has additional features or is of a larger size. The replacement of a washing machine with a washer-drier would (for example) constitute an improvement. Where the new item is superior to the old item, the amount that the landlord can deduct when computing profits is the lesser of:
- the cost of the new item; and
- the cost that would have been incurred had the old item been replaced on a like-for like basis.
Incidental expenditure
The landlord is also allowed to deduct the costs of any incidental expenditure, such as the cost of delivery, installation or disposal.
For example, if the landlord replaces a hob and pays for the old hob to be taken out and disposed of and the new hob to be delivered and installed, the costs of delivery, installation, removal and disposal can be deducted, along with the cost of the new hob.
Money received from sale of the old item
The old item may have some life left in it, and the landlord may be able to get something for it by selling it, whether on a site like e-bay or otherwise.
Any consideration received from the sale of the old item reduces the deduction available for the cost of the replacement item.
Part-exchange
As with any money received from the sale of the old item, any allowance that the landlord receives in part-exchange where the old item is traded in for a newer model will reduce the amount of the deduction.
For example, if the replacement on a like-for-like basis costs £200 and the landlord receives a £20 trade-in allowance for the old item, the deduction is capped at £180 – this is effectively the amount that the landlord is required to spend to obtain the new item.
Example: A larger sofa
A landlord replaces a two-seater sofa with a new three-seater sofa. The new sofa costs £1,800. The two-seater model, equivalent to the old sofa, costs £1,500. The landlord pays £50 delivery for the new sofa and sells the old sofa for £150.
He can deduct £1,400 in computing his profits, being the cost of an equivalent two-seater sofa (£1,500) plus delivery costs (£50), less proceeds from sale of the old sofa (£150).
Exclusions from relief
The relief for the cost of replacing domestic items does not extend to furnished holiday lettings.
Likewise, relief is not available for the cost of replacing domestic items in a room which is let in the taxpayer’s own home, in respect of which rent-a-room relief has been claimed.
Practical tip
Make sure that you claim relief when replacing domestic items, and don’t forget any incidental expenditure.
