From April 2016 the wear and tear allowance will end, to be replaced by a deduction for landlords when they actually spend the money. A consultation document has been released and any changes will be included in Finance Act 2016. Consultation closed on 9 October 2015.
Key aspects of the consultation document:
From April 2016 the Wear and Tear Allowance will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property.
The relief will apply to landlords of unfurnished, part furnished and furnished properties. The relief will not apply to ‘furnished holiday letting’ businesses (FHLs) and letting of commercial properties, because these businesses receive relief through the Capital Allowances regime.
The new replacement furniture relief will only apply to the replacement of furnishings. The initial cost of furnishing a property would not be included.
Under the new replacement furniture relief landlords of all non-FHL residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:
– movable furniture or furnishings, such as beds or suites,
– televisions,
– fridges and freezers,
– carpets and floor-coverings,
– curtains,
– linen,
– crockery or cutlery,
– beds and other furniture
HMRC believe that limiting the scope of the allowance to items that are provided for the tenant’s use in the dwelling house that is being let removes any opportunity to claim the cost of larger items used for the purpose of the property rental business, for example, cars. It remains to be seen whether this particular point makes it through to FA 2016 as this seems particularly contentious.
Fixtures integral to the building that are not normally removed by the owner if the property was sold would not be included because the replacement cost of these would, as now, be a deductible expense as a repair to the property itself. Fixtures include items such as baths, washbasins, toilets, boilers and fitted kitchen units.
Landlords will no longer need to be concerned with whether the item being replaced is a fixture (and therefore a repair to the property) or not. In either case, the cost can be deducted from their rental income to arrive at the profits of their property rental business.
Landlords will no longer need to decide whether their property is sufficiently furnished to claim the new replacement furniture relief, as they had to when claiming the Wear and Tear Allowance. This is because the new relief will apply to all landlords of residential dwelling houses, no matter what the level of furnishing.
The new replacement furniture relief will be for expenses that are actually incurred by landlords, rather than an arbitrary percentage. The value of the relief will no longer be dependent on the location that the property happens to be in and the local rates of rent. It will provide a better incentive for landlords to actually maintain the furnishings in their property. They will not be able to claim any relief without actual expenditure.
To ensure that the relief mirrors, as closely as possible, the landlord’s economic position, the new replacement furniture relief will give relief for the cost of the replacement asset, less any proceeds received from the old asset that is being replaced.
In line with the policy that relief for the initial cost of assets will not be given, any element of the replacement asset that represents an improvement would be excluded from the new replacement furniture relief. The replacement will include an improvement if the new asset can do more or if it can be used to do something that it could not do before. For example, replacing a washing machine with a washer-dryer is an improvement. If the washer dryer cost £600, and the cost of buying a new washing machine like the old one would have been £400 then the replacement furniture relief will be £400 (£600 less the £200 that represents the difference in cost between a washing machine and the washer dryer).
Comments – Landlords should not be replacing free standing white goods, furniture, carpets, curtains etc in 2015/16 unless absolutely necessary. The only time a landlord will get a deduction for replacement of these items in 2015/16 will be if the items were damaged beyond repair in a partly or unfurnished property. The emphasis of the replacement spend is therefore “repair” and it would be deductible. If the same items was being replaced simply because it was old then the replacement is not deductible as the renewals basis was scrapped in April 2013.
For furnished properties the wear and tear deduction covers replacement of these items so there would be no specific deduction for money actually spent in 2015/16.
If free standing white goods, furniture, carpets curtains etc are replaced in 2016/17 the replacement cost will be deductible in all cases.
