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HMRC gives full details of wear-and-tear tax changes

HMRC has revealed the scope of its proposed changes to the wear and tear allowance, as announced in George Osborne’s Budget earlier this month - and it wants the views of letting agents and landlords on the initiative.

Osborne stated that from April 2016 the formal Wear and Tear Allowance - which allows 10 per cent of rental profits to be written off for notional wear and tear, even if there has been no such actual expenditure in that particular year -  will be replaced with a relief that enables all landlords to deduct the costs they actually incur on replacing furnishings in the property. 

Now HMRC has announced the scope of the changes in an 11-page consultation document.  One important piece of news is that whereas the old wear and tear tax break applied only to fully-furnished properties, agents and landlords will in future  no longer need to decide whether their property is sufficiently furnished to claim the new replacement furniture relief. 

This is because the new relief will apply to all landlords of residential dwelling houses, no matter what the level of furnishing. 

The consultation document is available in full here but the critical details are as follows:

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. 

“We 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. 

“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. 

“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.”

Full details of the consultation process are contained at the end of the HMRC document on the link above. 

  • Rajeev Nayyar

    The consultation document makes it clear that if a replacement item represents an improvement then part of the cost (the part relating to the improvement) would not be an allowable expense.

    (Quoting from the consultation document an improvement is: if the new asset can do more or if it can be used to do something that it could not do before)

    A key question is how this would be applied in practice. For example would a landlord be required to apportion part of the cost of replacing a (possibly discontinued) 1000rpm washing machine with a 1400rpm washing machine as being an improvement cost. If so would they need professional valuation advice to do so?

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