We break down the findings of an 11-page HMRC consultation document to help you understand exactly what the new wear and tax relief rules mean for you.
By now, the vast the majority of you buy-to-let landlords will be familiar with the changes that are being made to the current wear and tear allowance. If you’re not, then the relatively old news is that from April 2016, the formal wear and tear allowance – which allows 10 percent of rental income to be written off for notional wear and tear, even if there has been no actual expenditure in that year – will be replaced with a relief which allows all landlords to deduct the cost they actually incur on replacing furnishings in the property.
Now, an 11-page consultation document has been published by HMRC, which announces the full scope of the changes. This article aims to break all that down into more palatable bite size chunks so you know exactly what is expected of you.
The HMRC consultation
Perhaps the most important change is that while the old wear and tear allowance applied only to fully furnished properties, the new tax relief will apply to all landlords of residential properties regardless of the level of furnishings. This removes the current uncertainty about whether a property is sufficiently furnished to claim the new replacement furniture relief.
The new relief will only apply to the replacement of furnishings. The initial cost of furnishing a property will not be included. The relief entitles landlords to claim a deduction for the cost of replacing furnishings, appliances and kitchenware provided for the tenant’s use. This includes:
Movable furniture such as beds or suites
- Fridges and freezers
- Carpets and floor coverings
- Crockery and cutlery
Fixtures that are integral to the property, which would not normally be removed if the property was sold, will not be included. However, these items are tax deductible as repairs to the property itself. This means landlords will no longer need to concern themselves with whether the item being replaced is a fixture (and therefore a repair to the property) or not, as in either case the cost can be deducted from their rental income.
This includes items like:
- Fitted kitchen units
The difference between replacements and improvements
The consultation document makes it clear that if a replacement item represents an improvement to the property, the part of the cost that relates to the improvement would not be an allowable expense.
The consultation defines an improvement as something ‘the new asset can do that it could not be used for before’. For example, if you replaced a washing machine for a washer-dryer, the drying element is a definite improvement. If the washer-dryer cost £500, and the cost of a replacement washing machine was £300, you will only be able to claim tax relief on the £300.
The administrative impact
This change will be accompanied by an additional administrative burden for landlords that currently claim the wear and tear allowance. No longer will they simply be able to claim 10 percent of their rental income in tax relief for improvements they may have not even made. Instead, they will need to keep a detailed record of their actual expenditure. However, in practice the real burden will be slight, as landlords already keep detailed records of their other expenses.
What do the changes mean for you?
If you’re unsure of the impact of these changes on you or any of your properties, the team at Open House Torbay will be more than happy to help. Get in touch today:
01803 659 000