On 6 April 2013 there was an important change to tax rules for residential property landlords (both individuals and companies).
HMRC have made quite a significant change to the rules around claiming tax deductions for the cost of furniture, equipment etc that landlords buy for residential property that they let out. Until April this year, there were two alternative ways to claim for these costs:
- 10% wear and tear allowance – landlords could claim a deduction of 10% of their rental income, which was designed to cover the depreciation of things like furniture, fridges, washing machines, carpets, curtains, linen, crockery, cutlery etc., or;
- Renewals basis – instead of claiming the wear and tear allowance, landlords could claim the cost of replacing an item, but not for its original cost. So although they couldn’t claim for buying a washing machine when they first bought one, they could claim for a replacement when it broke.
Landlords letting furnished property could choose between these two methods. For unfurnished or partly-furnished property, only the renewals basis was allowed.
However, HMRC have now withdrawn the renewals basis, meaning that:
- For furnished property – landlords have no choice but to use the wear and tear allowance
- For unfurnished or partly-furnished property – relief is no longer allowable for odd bits of furniture, fridges, washing machines etc.
Whilst landlords with furnished property shouldn’t see too much of an impact (the wear and tear allowance is still available), anyone letting unfurnished or partly-furnished property will no longer get any tax relief for this kind of expenditure.
The other thing to watch for is that HMRC are indicating that they will be reviewing carefully whether let properties meet their definition of “furnished”. In HMRC’s view, a furnished let is one where the tenant can move in bringing only food and clothes with them. So they would expect to see the property being fully furnished including things like curtains, linen, crockery and cutlery!
So, if you let a furnished property, we’d suggest that you review the furniture and other contents you’re providing, to minimise any risk of HMRC arguing that it fails to meet their definition of “furnished” if you’re claiming the wear and tear allowance. If your property is let unfurnished, partly furnished, or doesn’t meet the HMRC definition of furnished, then be aware that any expenditure on equipment and part furnishing won’t be tax deductible.
Having said all that, the rules on “repairs” have not been changed. So if you’re replacing old kitchen units, for example, you should still be able to claim for the cost as a repair. Some costs that landlords have taken for granted as tax-deductible no longer are, though.
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