Where a taxpayer lets a residential property furnished, capital allowances can’t be claimed on furniture, furnishings or fixtures. Instead a deduction can be claimed for either a wear and tear allowance or the net cost of replacing an item.
Quote: “If it ain’t broke don’t fix it” – attributed to the railway engineer Pullman when talking about railcars in an “Economist” interview in the 1930’s
Expenditure on your property falls into two categories. It is either to buy an asset that is expected to last some time or to maintain such an asset.
If your investment property is residential property then the “assets” include the house itself and the furnishings and equipment inside it.
These “assets” are split into two categories. Imagine that you can take the building, turn it upside down and shake it. What falls out is “furniture, and furnishings”. For the avoidance of doubt this category includes carpets, curtains and white goods and does NOT include the fitted kitchen, fitted bathroom and central heating system which are all part of the fabric of the building.
If you let a property unfurnished it will have little or nothing in the way of furniture and furnishings. If you let it fully furnished it will have everything a tenant needs to live there except for minor and personal items.
A partly furnished house does not qualify as a furnished letting for this purpose and the Wear and Tear Allowance is not available. However the Renewals Basis remains available regardless of the level of furnishing.
If you repair any item of furniture or furnishings then you may claim the cost of this in full as a deduction from rental income under the “Maintenance” heading. If you do not need to replace an item it is unlikely that it will be in the same condition in five years as it was when it was new and nor will it be worth as much. In other words, some of the value of the item (e.g. a carpet) is used up every year.
You have two choices as to the tax relief you get for this diminution in value that occurs over several years. You may either claim the Wear and Tear Allowance or you may claim the cost of replacement on what is called the Renewals Basis.
In neither case may you claim for the original cost. You may not claim both the Wear and Tear Allowance and the Renewals Basis. In some circumstances you may switch from one to the other – but not too frequently!
The advantage of the Wear and Tear Allowance is that it gives the landlord a 10% deduction from rental income every year whether or not any items of furniture or furnishings were replaced. This is particularly helpful in the early years of ownership as (one hopes) there will be little or no renewals in that time.
The Wear and Tear Allowance is calculated by taking the total rent received for a property and deducting the cost of Rates, Council Tax, Insurance, Ground Rent and Rent, and any other material services borne by the landlord but which would otherwise normally be a tenant’s obligation. The Wear and Tear Allowance is 10% of the resultant figure.
Page content supplied by: Maurice Patry FCA of www.landlordstax.co.uk
