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New wear and tear rules explained

Posted on 2015-08-28

The Summer Budget was big news for anyone involved in the Private Rented Sector, particularly the nation's landlords.

Changes to the tax system – which mean that mortgage interest tax relief for purchasers of buy-to-let homes is to be restricted to the basic rate of income tax – received the most attention, but a proposed change to the wear and tear allowance claims system arguably went a little more under the radar.

George Osborne proposed that from next April the formal Wear and Tear Allowance – which allows 10% of rental profits to be written off for notional wear and tear, even if there has been no actual expenditure in that year – is scrapped, replaced with a relief that instead allows landlords to deduct the costs they actually incur on replacing furnishings in the property.

The Government says the measure has been designed to improve the consistency and fairness in the taxation of residential property businesses. It says that value of relief will no longer be dependent on the location of the property and local rates of rent, which will be fairer on landlords where average rental income is lower.

It has also been proposed with the intention of providing a better incentive for landlords to actually maintain the furnishings in their property as they will not be able to claim any relief without actual expenditure.

Since it was announced, Her Majesty's Revenue & Customs (HMRC) has released further detail about what is being proposed as well as launching a consultation, asking for the views of landlords and letting agents.

The rules

One of the key bits of information revealed by HMRC is that the proposed change will apply to all landlords of residential dwelling houses, no matter the level of furnishing.

In the past, landlords had to determine whether or not their property could be deemed as 'fully furnished' in order to be able to take advantage of the ability to claim wear and tear allowance.

HMRC has confirmed that the new relief system will not apply to commercial property lets or furnished holiday lettings (FHL) as these businesses already receive relief via the Capital Allowances Regime.

In its clearest terms, HMRC states: “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.”

The examples it gives of furniture are - movable furniture or furnishings (beds or suites), televisions, fridges and freezers, carpets and floor-coverings, curtains, linen, crockery or cutlery, beds and other furniture.

The guidance also explains that the new rules will limit the relief to items provided for the tenant's use so that landlords can’t claim against 'larger items' used for the purpose of their property rental business.

Fixtures that would not be removed from a property if sold by the landlord will also not be included because the replacement cost would be a deductible expense as a repair to the property itself.
The examples of given of these items are baths, washbasins, toilets, boilers and fitted kitchen units.

The consultation

The consultation period was launched on July 17 and will run for 12 weeks until October 9.

Written responses should be submitted by the close date to wearandtear.replacement@hmrc.gsi.gov.uk or to Megan Shaw, HM Revenue & Customs, CTIS, 3/64, 100 Parliament Street, London, SW1A 2BQ.

HMRC also confirmed that it will be engaging with organisations such as the National Landlords Association, the Residential Landlords Association and the Association of Residential Letting Agents.
After the consultation closes, a response document will be posted later this year in advance of the Finance Bill 2016.

You can access HMRC's full consultation document here.

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