HMRC CHANGES TO THE ‘WEAR AND TEAR’ TAX

It is important that Landlords understand these proposed changes to tax legislation

Following George Osborne’s budget statement about proposed changes to the ‘wear and tear’ allowance, the HMRC have released information about how this will be implemented and are asking landlords and letting agents for their views.

The current allowance allows 10% of rental profits to be written off for wear and tear regardless of the actual expenditure in that particular year.  From April 2016 this will be replaced with a relief that enables landlords to deduct the costs they actually incur on replacing furnishings in the property.

The changes have been released by HMRC in an 11-page consultation document which can be viewed online.  One of the most important points in the new allowance is that agents and landlords will no longer have to decide whether their property is ‘sufficiently furnished’ for them to claim new replacement furniture relief.  Previously the relief would only have been applied to those properties classed as ‘fully furnished’.

In detail, the points are:

 This will apply to landlords of unfurnished, part furnished and furnished properties.

It will not apply to ‘furnished holiday letting’ businesses (FHLs) and letting of commercial properties, because these businesses receive relief through the capital allowances regime.

This "new replacement furniture relief" will only apply only to the replacement of furnishings. The initial cost of furnishing a property will not be included.

This "new replacement furniture relief" will mean that 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.

HMRC state that - 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
  • fitted kitchen units

Significantly - 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.

Also - 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 Consultation with Landlords and letting agents will run for 12 weeks from 17 July 2015 to 9 October 2015.

For further advice contact Alison Headey (email ah@obcaccountants.com or telephone  01323-720555).

 

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