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10% Wear & Tear allowance on rental property

10% Wear & Tear allowance on rental property

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Hi

I understood that 10% wear and tear on profit is income less costs i.e. all costs relating to the property (Mortgage Interest, Management costs, repairs etc)  is this correct or is it just Water, Rates etc. see below.

Found this on HMRC website

The wear and tear allowance is calculated by taking 10% of the net rent received for the furnished residential accommodation. To find the ‘net rent’ you deduct charges and services that would normally be borne by a tenant but are, in fact, borne by the taxpayer (for example, council tax, water and sewerage rates etc). 

Thanks

Ann

  

Replies (23)

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Euan's picture
By Euan MacLennan
29th Jan 2014 13:42

You are wrong

It is and always has been exactly what the HMRC website says.

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By MET128
29th Jan 2014 14:34

cryptic

not a particularly helpful answer! 

If aobrien understood what it said they wouldn't be asking for help now would they?!

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By BKD
31st Jan 2014 12:43

I don't think Euan's answer is cryptic at all. It's as clear ...

... and as helpful as it needs to be. He pointed out that the OP was wrong in her assumption and that HMRC's guidance is correct. What else needed to be said?

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By Russell Huk
29th Jan 2014 16:02

Ok, how about as an illustration where I receive £5k rent and my tenant pays 1k gas and electricity, 0.5k water, 1k council tax.  IS my 10% wear & tear on £5k or 2.5k?

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The triggle is a distant cousin of the squonk (pictured)
By Triggle
29th Jan 2014 16:07

I'd love to get some of my tenants paying the mortgage. Double bubble!

Russell - your W&T is on £5k.

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By BKD
29th Jan 2014 16:08

£5k


That wasn't hard, was it?

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By aobrien
29th Jan 2014 16:34

10% Wear & Tear allowance on rental property

 

Still not very clear, if it on 'net' income of all costs or just capital purchases and Rates etc as perviously.

Ann

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Euan's picture
By Euan MacLennan
29th Jan 2014 17:43

The law on Wear & Tear Allowance

... is set out in ss.308A-C ITTOIA 2005.  In particular, s.308C(5) says:

"(5) In subsection (4)(b) “relevant expenses” means expenses in relation to utilities, council tax or anything else the cost of which is, in the case of a furnished letting, normally borne by the lessee."

It is the "relevant expenses" which are deducted from the rental income to arrive at the figure on which the 10% allowance is calculated.

So, it means that you deduct any electricity, gas, water, sewerage or council tax which the landlord has paid.

Is that clear now?

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By carnmores
29th Jan 2014 19:05

for gods sake

read the tin and do what it says on the side

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By aobrien
31st Jan 2014 11:38

10% Wear & Tear allowance on rental property-how clever are you?

Well since I had such interesting, cryptic replies I have listed my figures below so who can tell me what the W & T allowance is - no prize for the correct answer but at least it will be clear! Also pasted below the full explanation from HMRC

It seems if the landlord has not paid for 'services' there is no W & T.  Also the first part ofthis relates to furniture Fixtures and fittings/plant and the second relates to services.  Who defines 'services' is an accountancy fee a service or the management company fee a service?

 

Mortgage interest (Sept 12-March 13)1526.21Buildings insurance (Sept 12- Mar 12)651.56Management fees (12 mths)918Winkworths reletting fee 12 months1224Furniture wear and tear allowance2040Investigate defective pump (Wired and Wonderful)72Gas Safety Check132Supply and fit new pump324Lock and key21Emergency plumber - boiler192New boiler3150Radiators48Gas certificate96Cleaning walls72Replace thermostat and radiators225Emptying dehumidifiers - housesitting60Dehumidifier123 Total Costs  £            10,874.77 Income  £            20,400.00NET INCOME PROFIT (Loss) £               9,525.23  

 

 PIM3200 - Furnished residential property: wear and tear allowanceSummary

Income from furnished lettings is part of the taxpayer's rental business. Generally the same rules apply as for other lettings.

But where a taxpayer lets a residential property furnished, plant and machinery capital allowances can’t be claimed on furniture, furnishings or fixtures within the property. Instead a deduction can be claimed for either:

a wear and tear allowance of 10% of the ‘net rent’ from the furnished letting to cover the depreciation of plant and machinery, such as furniture, fridges etc supplied with the accommodation,

or

the net cost of replacing a particular item of furniture etc, but not the cost of the original purchase; this is called a ‘renewals allowance’.

This is ESC/B47. More details about what this concession covers and how it is operated are given below.

A taxpayer may let both furnished and unfurnished property. If so, you must ensure that the 10% is calculated only on the net rent from the furnished lettings.

If a landlord receives a premium for the grant of a lease of furnished residential property then the chargeable amount of the premium is included in the ‘net rent’ for the purposes of computing the 10% wear and tear allowance for the relevant tax year (see PIM1200 onwards).

Before 1975-76, when the general 10% basis started, there were several bases in common use. We will not disturb these so long as the let properties to which they apply remain in the same ownership and they continue to be used. But a taxpayer can change to the 10% basis if they wish. Any new properties must use the 10% basis.

Furnished holiday lettings are different

Furnished holiday lettings are different because plant and machinery capital allowances may be claimed as if the activity were a trade. For these lettings a taxpayer can claim plant and machinery allowances on plant and machinery in the accommodation and the wear and tear allowance isn’t available - see PIM4100 onwards.

What the 10% wear and tear allowance covers

The 10% wear and tear allowance is only designed to provide a measure of relief for the depreciation of the plant and machinery within a residential property. It isn’t intended to cover:

the capital cost of the residential property itself or the cost of improvements to the property; but a taxpayer may be able to claim relief for repairs (see PIM2020),plant and machinery in other kinds of furnished accommodation, such as offices (where capital allowances may be claimed).

The wear and tear allowance is calculated by taking 10% of the net rent received for the furnished residential accommodation. To find the ‘net rent’ you deduct charges and services that would normally be borne by a tenant but are, in fact, borne by the taxpayer (for example, council tax, water and sewerage rates etc).

The 10% deduction is given to cover the sort of plant and machinery assets that a tenant or owner-occupier would normally provide in unfurnished accommodation. These are things like:

movable furniture or furnishings, such as beds or suites,televisions,fridges and freezers,carpets and floor-coverings,curtains,linen,crockery or cutlery,plant and machinery chattels of a type which, in unfurnished accommodation, a tenant would normally provide for himself (for example, cookers, washing machines, dishwashers).

This list isn’t meant to be complete but gives an idea of the assets the wear and tear allowances covers.

Title to the 10% deduction does not depend on the provision of each and every item in the list. The relief is calculated simply on the net rents and not on the cost of particular items. But the deduction is only due if furnished accommodation is genuinely provided. A furnished property is one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc. The provision of nominal furnishings will not meet this requirement. If the accommodation isn’t furnished, or only partly furnished, the 10% wear and tear allowance isn’t due.

Possible advantages of 10% wear and tear allowance

The possible advantages of the 10% wear and tear allowance over the alternative, (the renewals allowance) are that:

it is simple to calculate,the taxpayer gets a deduction from the outset; the renewals basis - outlined below - only gives relief when they replace the furnishings etc.

If a taxpayer chooses to take the 10% wear and tear allowance, they can’t later claim for the cost of replacing the assets (but they can claim the cost of repairing them). Nor can they deal with some assets on one basis and some the other. If they take the 10% wear and tear allowance that is the only relief they can have for the depreciation of plant and machinery (furniture, furnishings and fixtures etc) of a type that, in unfurnished accommodation, a tenant would normally provide for himself (see the list above).

Renewals & 10% wear and tear allowance

However, in addition to the 10% allowance, a taxpayer can also deduct the net cost of renewing or repairing fixtures that are an integral part of the buildings. The net cost means the cost of the replacement less any amount received for the old item. See below for renewals of fixtures in unfurnished property.

Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold. For example, baths, washbasins, toilets, central heating installations. Expenditure on renewing such items is normally a revenue repair to the building. It is due even though the 10% wear and tear allowance has been deducted.

But a taxpayer cannot deduct:

the original cost of installing these fixtures,the extra cost of replacing a fixture with an improved version; for example, where a worn out but basic, cheap bathroom suite is replaced with an expensive, high quality suite; they can only deduct the cost of replacing like with like.

The original cost of installation means either:

the cost of installing the assets for the first time in a new property, orthe cost of replacing worn out assets in an old property that has been bought to let, orwhich you are converting to let.

For more about capital expenditure (not allowable) and repairs (allowable) see PIM2020.

Renewals: furnished & unfurnished property

The cost of replacing plant and machinery supplied with the property can be claimed as an expense where neither the 10% wear and tear allowance nor plant and machinery capital allowances are claimed. This is called the ‘renewals basis’. It is like the wear and tear allowance for furnished letting in that:

the renewals basis covers the same kind of assets; that is, free-standing movable plant and machinery assets like furniture, carpets, curtains, cookers, fridges etc, andas a separate matter, revenue relief may also be due for replacing fixtures in the same way as in the wear and tear case (see above).

The renewals allowance is also available for unfurnished property. Here we will mainly be concerned with fixtures. But the taxpayer may also provide some plant and machinery assets to the tenant (such as a heating boiler) although the let can’t be regarded as ‘furnished’. The taxpayer can claim a renewals deduction in the same way but they can’t claim the 10% wear and tear allowance because they don’t come within the terms of ESC/B47 (see above).

Whatever basis is chosen must be followed consistently. It isn’t possible to chop and change between the wear and tear allowance and the renewals allowance from year to year.

Example illustrating renewals principles

Malcolm replaces a washing machine in a flat he lets. He sells the old washing machine for £20 and buys a washer dryer costing £559 to replace it. The cost of buying a new washing machine like the old one would have been £399. Malcolm deducts from the £559 both the £20 received for the old machine and the £160 that represents the difference in cost between a washing machine and a washer dryer. His renewals deduction is therefore £379.

Sometimes it is impossible to find the current cost of replacing an old asset with something identical. In the previous example, the old washing machine may be of a kind which is no longer made. Common sense has to be used to find the cost of a reasonable equivalent modern replacement.

Further guidance on the renewals basis can be found at BIM46935.

Concessional allowances

Where a taxpayer claims that the 10% allowance is inadequate, you should say that HMRC is only prepared to give this concession on its own terms. It is always open to the taxpayer at the outset to adopt the renewals basis instead. In other cases the 10% allowance may seem over-generous, but you should not seek to restrict the deduction for that reason. 

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Replying to Ruddles:
Stepurhan
By stepurhan
31st Jan 2014 12:45

You do know what day it is don't you?

aobrien wrote:

Well since I had such interesting, cryptic replies I have listed my figures below so who can tell me what the W & T allowance is - no prize for the correct answer but at least it will be clear! Also pasted below the full explanation from HMRC

Wall of text.

Seriously? You are having trouble dealing with one of the simpler parts of the tax legislation. You receive a bunch of answers that are not in any way cryptic. Your response to continuing to not understand is to post a wall of text expecting everyone to read it on tax return deadline day.

Go and see an accountant in person. Find out what you've been told here is correct. But not today.

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By ACDWebb
31st Jan 2014 11:45

What's the problem?

It is what you have claimed. Job done.

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By BKD
31st Jan 2014 12:05

The answer is in the question

Winkworths reletting fee 12 months 1224

Furniture wear and tear allowance 2040

Investigate defective pump (Wired and Wonderful) 72

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By aobrien
31st Jan 2014 12:05

..10% Wear & Tear allowance on rental property

 

Another cryptic answer no prize for you !

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By justsotax
31st Jan 2014 12:18

perhaps you should

go and pay for the advice....

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By BKD
31st Jan 2014 12:22

What is cryptic about the above 2 answers?

You asked a simple question and got two straightforward answers.

It reminds me of:

 

And neither answer is as cryptic as "It seems if the landlord has not paid for 'services' there is no W & T"

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By bilco123
31st Jan 2014 12:24

10%

I am about to embark on letting residential property having in the past concentrated on Industrial units so am not overly sure of the facts. As I understand it you assume the tenant has paid the utility bills (for tax purposes) deduct normal expenses such as accountancy / lettings agency fees and repairs and then deduct 10% off what is left i.e 10% of the income after deductions. The 10% allowance being there for wear and tear an moveable property. I believe to qualify for the 10% allowance the property only has to be part furnished e.g. curtains, carpets not beds and bedding etc.

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By bilco123
31st Jan 2014 12:32

10%

I am about to embark on letting residential property having in the past concentrated on Industrial units so am not overly sure of the facts. As I understand it you assume the tenant has paid the utility bills (for tax purposes) deduct normal expenses such as accountancy / lettings agency fees and repairs and then deduct 10% off what is left i.e 10% of the income after deductions. The 10% allowance being there for wear and tear on moveable property. I believe to qualify for the 10% allowance the property only has to be part furnished e.g. curtains, carpets not beds and bedding etc.

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By BKD
31st Jan 2014 12:34

Wrong, wrong, wrong, wrong, wrong

The allowance is calculated as 10% of the gross rents, less only costs that the landlord has met which would normally have been met by the tenant. The landlord will normally pay for accountancy/letting fees etc so although these are deductible in computing the taxable profit they are not deducted for the purposes of calculating the allowance. As I think has been made abundantly clear (quite why some find it so difficult to understand, I don't know) the items that are deducted in computing the allowance are few and far between - Council Tax, utility bills etc (for the avoidance of doubt, only where the landlord has paid them instead of the tenant).

As for the extent of furnishing, the rule of thumb is that the tenant should be able to live in it without providing his own furniture. So beds would normally be required (though there has been some debate on this). Certainly, provision of carpets and curtains only would not suffice.

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Replying to leeanthonyblackshaw:
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By aobrien
31st Jan 2014 15:15

10% W & T

 

Thank you yes it is clear now, I think most people always assume a 'Net' figure means gross less costs - in general.

 

I phoned HMRC and interesting I spoke to three people before I got the correct answer, each person told me something different, I insisted on speaking to someone else and was redirected to an expert!

 

Many thanks again for all the replies and I did not expect people to put aside valuable time today to answer me I am very greatful

 

A

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By ACDWebb
31st Jan 2014 12:48

No

aobrien pasted a huge amount of stuff but the relevant bit is:

"The wear and tear allowance is calculated by taking 10% of the net rent received for the furnished residential accommodation. To find the ‘net rent’ you deduct charges and services that would normally be borne by a tenant but are, in fact, borne by the taxpayer (for example, council tax, water and sewerage rates etc)."

What in your list of expenses would you expect the tenant to be responsible for? I would suggest nothing. They are all costs of repairs & purchase of the property. If they were responsible for them they would own it!

It is quite clear from the the section above what you have to take account of in arriving at 'net rent' for the W&T.

The legislation at ITTOIA s 308B (1)(b) requires that:

"the dwelling-house contains sufficient furniture, furnishings and equipment for normal residential use," So part furnished will not do it. HMRC guidance notes say the tenant should be able to take up residence without having to move in their own furniture

s308C goes on

"(3)     The amount of the wear and tear allowance is 10% of the relevant rental amount.

(4)     In subsection (3) “the relevant rental amount” means—

(a)     the sum of the amounts brought into account as receipts by P in calculating the profits of the property business, so far as the receipts are within subsection (6), less

(b)     the sum of any amounts brought into account as relevant expenses by P in calculating the profits of the property business, so far as the expenses are within subsection (6).

(5)     In subsection (4)(b) “relevant expenses” means expenses in relation to utilities, council tax or anything else the cost of which is, in the case of a furnished letting, normally borne by the lessee."

Would you expect the tenant to be responsible for the mortgage, or the management fees, or a new boiler, or frankly anything in your list? No? Well there's your answer isn't it?

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