At Summer Budget 2015, George Osborne announced that the Wear and Tear Allowance for landlords would be replaced with a new tax relief from April 2016 onwards. Following the publication of a consultation document by HMRC, we now have a better idea of how the new relief will work. And as expected it will not be good news for landlords of furnished properties, meaning bigger tax bills and more admin. However, it should benefit landlords of part-furnished properties as they should see a reduction in their tax bills.
What is the Wear and Tear Allowance?
The Wear and Tear Allowance is available to landlords of furnished property to compensate them for the cost of renewing furnishings in their rental properties. It is given in the form of a deduction from taxable profits equal to 10% of the rent received. Where the Wear and Tear Allowance is claimed no further deduction can be claimed for the cost of replacing furnishings.
The Government has announced that the Wear and Tear Allowance will be withdrawn for 2016/17 and subsequent tax years.
How will the new tax relief work?
We will not know the answer to this for some time as the new rules are still being drafted. However, we can expect the new relief – the replacement furnishings relief – to work as follows.
A landlord who incurs an expense in renewing a furnishing will be able to claim relief for that expense against his taxable profits from his rental business. Note the emphasis on ‘renewing’: no relief will be available for the initial purchase of a furnishing, and relief is restricted to the cost of a direct replacement; i.e. if part of the expense relates to an improvement element then no relief is due for that part of the expense.
HMRC give the example of a landlord replacing a washing machine with a washer dryer at a cost of £600. The cost of a direct replacement (i.e. a washing machine) is £400. The landlord is able to claim the replacement furnishings relief in respect of so much of the expense as represents the direct replacement of the original asset – £400. No relief is available for the additional cost of £200.
The term ‘furnishings’ includes: moveable furnishings (eg beds); moveable white goods (eg a fridge); floor coverings (eg carpets); curtains; televisions; and crockery and cutlery. It does not include fixtures which are deemed to be part of the building such as sinks, baths, toilets, boilers and fitted kitchen units. In most cases, the renewal of these items will qualify for tax relief as a repair to the building as a whole.
The new replacement furnishings relief is expected to apply for 2016/17 and subsequent tax years.
What will be the effects of this?
For all landlords this will mean additional work in keeping records and grappling with the tax rules to determine if relief is due or not (I’m thinking of the ‘improvements’ exclusion in particular here).
And most landlords of furnished property can expect to pay more tax as a result of this. This is because the benefit of the Wear and Tear Allowance is generally greater than the amount spent on renewals of furnishings. The Government’s own figures support this as George Osborne & Co. expect to be better off to the tune of approximately £700m by the end of this Parliament as a result of this measure.
But what of landlords of part-furnished properties? They should be better off under this measure. Currently, and due to what seems to have been an unintended change to the law by HMRC back in 2013, landlords of partly-furnished properties can’t claim relief for the cost of renewing most furnishings. This will change from 2016-17.
As stated above the new relief is at an early stage of development and may change before its introduction next April. We will be monitoring this and will let our clients know of any significant changes. We will also be contacting all of our landlord clients before April 2016 to make them aware of the changes so that they know to keep records of all qualifying expenditure.
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