Tax has been a worry for landlords throughout the past 12 months. Many changes have been brought in, most notably the stamp duty hike, and a wave of further regulatory and tax changes are due to take effect in April 2017. With the scrapping of the ‘Wear and Tear’ allowance in April 2016, it’s not been easy for landlords, has it?
The wear and tear allowance served landlords well, but the recent changes have caused most buy-to-let mortgage owners a headache. Under the old ‘Wear and Tear rules, landlords were able to deduct 10% of their rental income in calculating taxable profit to allow for wear and tear of a property. Nice and straightforward. It was beneficial to landlords as there was no clear definition of ‘furnished’ and even if a landlord hadn’t bought any new furniture, it was still possible for him or her to claim the 10%. However, this was replaced by the Replacement Furniture Relief (RFR) system, allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the same tax year.
Here, Managing Director of Online Mortgage Advisor, Pete Mugleston, explains what the changes mean and shares ways to maintain profitability despite amendments to the allowances.
What is eligible for relief?
Relief is available for ‘domestic items’ which includes:
- Moveable furniture
- Household appliances such as fridges and freezers
- Kitchenware such as crockery and cutlery
- Furnishings such as carpets, curtains and linen
If you invest in an empty property that needs furnishing, you won’t be able to claim any relief against any new furniture, as essentially you’re not replacing anything. To avoid the potential lack of income, it’s worth considering buying an existing buy-to-let property with worn furniture. When you replace the furniture you’ll obtain a tax deduction for the costs.
It’s important to note, you’ll only be able to claim ‘like-for-like’ replacements. So if you want to replace a £300 cooker, then only buy a £300 cooker to replace the old one. Of course you can’t stick to exact figures, but don’t replace a standard appliance with top-of-the-line.
You’ll be pleased to know that it’s not just the physical furnishings that can be used as deductibles. Removal, disposal and delivery costs can be calculated to ensure you don’t miss out. Also, the money spent on selling the old appliance or furniture, such as an auctioneer’s costs, can be used as a deductible too. But note, the money you make from selling the old furnishings will be taken from the total amount you’re eligible to claim back.
If organisation isn’t one of your strong points, it may be time to change your ways. The new RFR rules require more managing and you need to make notes of what you’ve bought and where, how much it cost including the minutiae that come with it. So make sure you keep hold of your receipts.
With the old wear and tear allowance, it was swings and roundabouts. Sometimes your actual replacement costs exceeded the 10% allowance, sometimes the 10% exceeded the costs you’d made. The new system, although very structured, balances your finances out.
There’s definitely a lot more to manage with the RFR, especially if you have a considerable portfolio of properties. But if you make the necessary changes, you’ll still maintain profitability. Essentially, you don’t need to panic – there’s still plenty of options.
Acknowledgement: This article was supplied by Pete Mugleston, founder of Online Mortgage Advisor (OMA). OMA puts those looking for independent mortgage advice across the whole spectrum of situations in touch with experienced, whole of market advisors; including those who specialise in buy-to-let mortgages.
Article Courtesy of: www.onlinemortgageadvisor.co.uk