HMRC consultation on reform to ‘wear and tear allowance’ for landlords
In the Summer Budget 2015 the Government confirmed its intention to introduce measures intended to improve how landlord’s businesses are taxed.
The new measures are designed to provide consistency and fairness in the taxation of rented properties.
The changes proposed include - 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, will be replaced.
From April 2016 landlords will only be allowed to deduct the costs they actually incur for replacing furnishings in their rental properties.
Eligibility: All landlords will be eligible for the relief irrespective of whether they let their property on an unfurnished, part furnished or fully furnished basis. However, Furnished Holiday Lets and commercial premises are excluded.
NOTE: The relief will only cover replacing existing furnishings – landlords cannot claim for the initial purchase of furnishings (i.e. when they buy a new property and furnish it for the first time).
How it will work:
Landlords will be able to 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 cannot 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.
ARLA – The Association of Residential Letting Agents has responded in full, the reponse includes but is not limited to:
Due to the sharp rise in demand for rental property in recent years ARLA recognises that the upkeep of rental accommodation now requires increased attention. We are pleased the new replacement furniture relief will apply to all landlords of all residential dwelling houses; no matter the level of furnishing; and that landlords will no longer need be concerned whether an item being replaced is a ‘fixture’ or not.
However, they argue that the initial cost of furnishing a property should be included in the scheme; as it is currently contained within the Wear and Tear Allowance. By withdrawing this relief, landlords will be faced with a larger financial burden when first setting up a property to rent.
Taking this issue further, they recommend that any new items purchased by the landlord at a tenants request during a tenancy (or before the tenant moves in) should also be included within the scope of the scheme.
The administrative burden placed on landlords by these changes should also not be underestimated. Significant amounts of evidence will be required in order to claim this relief and comprehensive guidance will need to be produced in order to clarify the issues raised in this response and for landlords to fully understand what they can and cannot claim.