At the beginning of April this year, HMRC published an innocuous sounding document called “Revenue and Customs Brief 5/2013”, which contained “draft revised guidance” on repairs and their treatment for income tax and corporation tax. This could mean no more renewals allowances for rental properties.
Within this document was confirmation that HMRC will no longer accept claims for the extra-statutory “renewals allowance” for expenditure incurred after 5 April 2013 (1 April for companies). This was announced some time ago, but I suspect everyone had forgotten about it, but it is now here and will severely affect landlords of residential accommodation.
The renewals allowance was an old practice that first grew up before capital allowances were available, which effectively gave a tax deduction for the depreciation of items of plant and machinery.
The cost of the purchase of the first item was not allowed, but after that the cost of replacing it was — subject to adjustments for any sale proceeds of the old item or for any element of improvement in the replacement item.
Example 1 – Renewals & Furniture
Jane owns a property which she lets furnished. She could not claim a deduction for the furniture she purchased when she first fitted out the property for letting, but whenever she has to replace an item of furniture, or a television, or a cooker, for example, she can claim a deduction under the renewals allowance for the cost of the replacement.
From 5 April 2013, Jane can no longer claim a deduction for this expenditure.
The withdrawal of the renewals allowance applies to all businesses using plant and machinery, but it will hit landlords of residential property particularly hard. This is because unlike any other trade or business, a landlord of residential property cannot claim capital allowances on plant and machinery that is for use “in a dwelling house”. Jane, in the example above, cannot claim capital allowances on the furniture in her let property — whereas if she were letting out furnished offices, she could.
Wear and tear allowance
So what is the alternative? Provided the property is “fully furnished” (which HMRC take to mean that the tenant can effectively move in with just a suitcase full of clothes and find everything he needs in the way of beds, chairs, tables, and kitchen appliances, crockery, and so on) the “wear and tear” allowance can be claimed instead. This is calculated as 10% of the rent on the property (less any part of the rent that covers items like electricity etc that would normally be paid directly by the tenant).
In some cases, the wear and tear allowance may give a better result than the renewals allowance, but not in every case, and the point is that there is now no choice.
Landlords of unfurnished or only partly furnished accommodation are even worse off —they cannot claim the wear and tear allowance, and now they cannot claim renewals either.
So what is left? The only possible claim is for repairs, and HMRC have made it quite clear that replacing (say) a worn out television with a new one is not a “repair”, because it is a replacement of “the entirety” of the item.
The only good news is that they will accept that replacing fixtures (the boiler in the central heating system, for example) is a repair because it is a repair to the building.
Example 2 – A new kitchen
Jane decides the kitchen in her let property is looking rather tired, and so she decides to replace it. She rips out the old fitted units and the fitted cooker and hob, and replaces them with modern ones. The old fridge and washing machine are also replaced.
Jane can get a deduction for the cost of replacing the fitted units and the fitted hob, because these are repairs to the building, but not for the cost of the new fridge and washing machine (which are not “fixtures” and so are not repairs).
I have heard it suggested that one way round this problem is to set up a company to buy furniture and then rent it to the property business — the idea being that the rental company will be able to claim capital allowances on the furniture. This is likely to be caught by the rules on “special leasing” which specifically deny capital allowances on plant leased to be used in a “dwelling house”
If your property is only partly furnished, consider making it fully furnished — at least you will be able to claim the 10% wear and tear allowance. Alternatively, go to wholly unfurnished — if you can’t get an allowance for replacing it, why provide it?
This article supplied to LandlordZONE® by Property Tax Insider®
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