Changes to wear and tear tax allowance
Thu 08 Dec 2016
The new measures are intended to improve how landlords businesses are taxed and to provide consistency and fairness in the taxation of rented properties. There was much debate over these proposals and how they were going to affect landlords when they were introduced and it looks like most of our landlords have been affected to some degree.
The current 10% Wear and Tear Allowance which allows landlords to reduce the tax they pay, regardless of whether they replace the furnishings in their property, has been replaced. From April 2016 landlords have only been allowed to deduct the costs they actually incur for replacing furnishings in their rental properties.
How it works:
Landlords can now claim for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use; such as beds, wardrobes, tables, sofas, fridges, washing machines, carpets, curtains, cutlery and crockery. However, if the landlord sells the item being replaced, the sale price of that item must be deducted from the purchase price of the replacement and the tax relief can only be claimed on the remainder.
Further, landlords can no longer claim for ‘improvements’. If the replacement item is an improvement on what was there before (i.e. a washing machine is replaced with a washer-dryer), then only the cost of a like-for-like replacement can be claimed.
Landlords will no longer need to decide whether their property is sufficiently furnished to make a claim as the new rules apply to all rented properties no matter the level of furnishing.
Under the old system, with a 10% allowance, the higher the rent, the larger the tax relief. In some areas of the country, 10% was not sufficient to cover the actual costs incurred, whilst other landlords were routinely claiming the 10% without actually providing replacements etc.
This new system will ensure that landlords can claim their actual costs and provide a level-playing field for landlords wherever they operate in the country. However, there will be a significant administrative and record keeping burden placed on landlords in order to claim the tax relief.
Our advice is to ensure that landlords retain all receipts for any works carried out to a property, or for any furniture bought, or improvements carried out. Secondly, we advise all landlords to obtain a detailed Inventory prior to any tenancy commencing. We can assist with this, if required.