Nearly half (47 per cent) of landlords will be affected by the announcement in the post-election Summer Budget about the removal of the annual wear and tear allowance, according to research conducted by the National Landlords Association (NLA).
The change, if confirmed after a consolation process and the passing of the Finance Bill in the autumn, will remove the 10% allowance against net rent to allow for the replacement / depreciation of furniture and furnishing’s in rental accommodation, providing the house is fully furnished, but regardless of whether replacement have been made in the tax year.
Wear and Tear Allowance
The 10% wear and tear allowance had the advantage of simplicity for fully furnished properties. The allowance was given as a deduction in computing the profit from the taxpayer’s rental business and aimed to provide relief for items of furniture and fixtures contained within a let furnished residential property. It was designed to cover items that a landlord would typically provide in furnished accommodation, such as:
- beds, chairs, sofas, wardrobes, tables and other items of moveable furniture;
- carpets and other floor coverings;
- crockery or cutlery;
- washing machines;
- dishwashers etc.
It has not been necessary to provide every item on the list to claim the allowance. The allowance is determined by the rent charged rather than by the cost of the items provided, and the allowance is simply 10% of the net rents from let furnished accommodation.
Net rent is the rent from the furnished properties less charges and services that are normally paid by the tenant but which are met by the landlord. Examples would be council tax, water rates etc. If the landlord lets both furnished and unfurnished property, the allowance is only based on the rents received from the furnished properties.
The NLA’s research findings show that a quarter of landlords (24 per cent) let their properties fully furnished, with 22 per cent letting a mixture of furnished and unfurnished properties. Just over half of landlords (53 per cent) let their properties on an unfurnished basis.
The Chancellor announced in his July Budget that from April 2016 the Wear and Tear Allowance will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property. He claims this will give relief for capital expenditure to a wider range of property businesses as well as a more consistent and fairer way of calculating taxable profits.
The proposals would, the government argues, give greater consistency and fairness across the residential property letting sector and reduce the number of tax rules applying to the residential property sector.
Scope of the new replacement furniture relief:
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, including movable furniture and furnishings such as:
- Carpets and flooring
- Crockery or cutlery
The new system, which is currently under consultation until the 9th of October 2015, will apply from 6 April 2016 for Income Tax purposes and 1 April 2016 for Corporation Tax, and will cover the cost of replacement furniture, furnishings, appliances and kitchenware provided for tenants.
Chris Norris, Head of Policy at the National Landlords Association said:
“We fully understand the frustration of those landlords who let exclusively on a furnished basis as the removal of this allowance will very likely represent a reduction in the relief they can claim.
“However, it will come as a welcome revision for those letting a mixed portfolio, unfurnished, or part-furnished property as the replacement system will allow them to deduct legitimate revenue expenses in the future.
“The NLA has broadly welcomed these proposals as it should lead to a fairer system for more landlords. However, as we transition from one system to another, we will push to make sure that any landlords who’ve made recent investments with the expectation of offsetting the cost over a number of years using the current allowance, will not be disadvantaged”.
— LandlordZONE® (@LandlordZONE) August 20, 2015