Replacing the wear and tear allowance

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Accountants who have landlords as clients have been having a difficult time over the past three years. The difficulty has been in being able to give considered advice to those clients claiming for the replacement of furniture, furnishings, appliances etc as the government has changed its mind more than once.

The government are intending to make the claims easier with proposals contained in consultation document titled: ‘Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let Residential Dwelling – Houses’.

Pre April 2013 rules

Pre April 2013 it was ‘messy’ - landlords of unfurnished lettings could claim tax relief on the cost of replacing (‘renewing’) items, (not on the original purchase cost – this remains) whilst landlords of furnished lettings had the choice of either claiming the same ‘renewals’ allowance or the 10% of net rents ‘Wear and Tear’ allowance; this allowance permitting a reduction in tax, regardless of whether items were actually replaced.

Post April 2013 rules

The ‘Enactment of Extra Statutory Concessions Order 2011, s 11’ withdrew the ‘renewals basis ’ under ESC B47 as from 6 April 2013 and placed the ‘Wear and Tear’ allowance on a statutory basis such that unfurnished lettings could no longer claim and furnished lettings no longer had the choice, they had to claim the 10% ‘Wear and Tear’. Fine if the items being purchased totaled less than the 10% amount but restrictive if the item (s) were greater. The problem was further exacerbated with the withdrawal of ESC B1 which dealt with the consequences of voluntarily switching from the non-statutory ‘Wear and Tear’ allowance to the statutory basis of relief. The ‘abolition’ of the ’renewals’ allowance produced an unfair result for landlords of unfurnished or part furnished properties such that no claim was possible – they were just left with claiming as a ‘repair’ or possibly as ‘replacement’.

If an item could not be repaired but needed to be completely replaced you could try TTOIA 2005, s 68 ‘Replacement and alteration of trade tools’. This section applies to expenditure ‘incurred on replacing or altering any tool used for the purposes of a trade’ and is normally considered to refer to small items such as hammers and chisels etc but tax cases have extended the relief to include other items of plant and machinery. However, as property letting is not a manufacturing business trying to persuade HMRC to allow a claim for the cost of an item replaced under this section is not straightforward.

What is now being proposed?

In the Consultation document it is proposed that as from 6 April 2016 the ‘Wear and Tear Allowance’ is to be replaced by a new ‘Replacement Furniture Relief’ (RFR) for all landlords whichever type of property, furnished or unfurnished. The rules allow for the deduction of costs actually incurred for the replacement of furnishings. The type of items will be limited to those used by tenants.

Certain items are deemed to be part of the fabric of the property itself (e.g. baths, toilets, boilers, and fitted kitchens), replacement of these will still be treated as an allowable ‘repair’ to the property itself.

How many landlords will be affected?

The proposals concerning the restriction of interest relief have attracted more comments both in the press and on this site but the new RFR will also have an impact. According to the National Landlords Association (NLA) almost half (47%) of landlords will be affected. Nearly a quarter of landlords (24%) let fully furnished with 22% letting a mixture of furnished and unfurnished properties.

Benefits of the proposals

All consultation documents state that the reasons for the proposals are ‘to improve ... consistency and fairness’.

The immediate thought is that the proposals have produced a fairer more understandable system and possibly a ‘level playing field’.

  1. Landlords will no longer need to decide whether their property is sufficiently furnished to be permit a ‘Wear and Tear’ claim as the RFR applies to all rented properties no matter the level of furnishing. 
  2. It will come as a welcome revision for those letting a mixed portfolio.
  3. It will remove the unfairness whereby some fully furnished property landlords reduce their tax liability even when no or little cost has been incurred. HMRC are hoping that by only making tax relief available on the money actually spent (rather than receiving an automatic 10% even if no money spent) then that will encourage landlords to replace furnishings on a more regular basis – that will not necessarily happen.
  4. There will be no restriction for costs incurred on furnished properties if higher than the 10% amount – the whole amount will be claimable. As HMRC states in the document: ‘...with the current 10% allowance, the higher the rent, the larger the tax relief but in some areas of the country, 10% is not sufficient to cover the actual costs incurred. The proposal will ensure landlords can claim their actual costs and provide a level-playing field for landlords wherever they operate in the country.’

Will anyone suffer?

  1. The original reason for implementing the ‘Wear and Tear’ allowance was to save landlords of furnished properties the bother of keeping detailed records. In this consultation paper HMRC state that they believe that the administration impact on landlords will be negligible, as they are already required to keep records of other expenses. This belief does not take into account those landlords who own a number of fully furnished properties who up until now have not been required to keep detailed records. However, other businesses are required to keep detailed records so why not a landlord who runs what is, in effect, a rental business?
  2. Tenants may suffer in instances where the landlords’ tax bill is higher on the withdrawal of the 10% allowance. Where margins are low the landlords might not be able to afford to replace or even supply furniture. Landlords may be discouraged from making improvements if it leaves them out of pocket, the number of furnished properties may reduce.

The NLA has broadly welcomed the proposals, but have called for ‘the introduction of transitional provisions to ensure that landlords who have recently invested in furnishings – planning to offset the cost over a number of years using the allowance – are not disadvantaged’.

The Association of Residential Letting Agents has not been so welcoming arguing that ‘landlords will not only be less inclined to buy good quality furniture and furnishings initially, but also that the subsequent reduction of tax relief could result in a rise in the price of rents. It is anticipated that landlords will try to balance their books and recoup the lost revenue with a hike in prices, further reducing a tenant’s ability to save for a deposit’.

Planning tip:

Furnished lettings landlords are advised, if possible, to postpone any replacements of furniture, TVs, carpets, curtains, etc until after 6 April 2016, claim the ‘Wear and Tear’ allowance for 2015/16 and the ‘RFR’ subsequently.

The consultation document asks just three questions:

             1.     Do you have any comments on the proposed scope of the new relief?

2      Do you have any comments on the proposals for dealing with any disposal proceeds from the old asset that is being replaced or any improvement element of the replacement asset?

3       Are there additional impacts on individuals or other businesses that are not covered in the table of impacts?

AccountingWEB has obtained permission to submit a late response – please make any comments below and we will include them.

About Jennifer Adams

Jennifer Adams

Jennifer Adams is Consulting Editor of AccountingWEB and is a professional business author specialising in corporate governance and taxation. She runs her own accounting and consultancy business with offices based in Surrey and Dorset.

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13th Oct 2015 09:33

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The main issue as I see it is the fact the initial furnishing is a "tax nothing".

When you had the choice between a furnishing claim and the 10%, it made sense to exclude on the basis that otherwise a landlord would opt for the 'arising' basis on furnishing a newly furnished property (when it might well be a lot more than 10% in year one, especially if let for only a few months in the tax year), and then 10% when in future years when there is likely to be minimal replacement for a number of years. 

However, now there is no relief for initial furnishing under any heading which is odd to say the least. 

It could perhaps be classed as 'plant' and subject to capital allowance regime, or simply an allowable revenue cost but being a 'tax nothing' is very odd indeed and makes no logical sense to me.

 

 

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13th Oct 2015 15:36

Agree last post

Personally I think that the UK tax rules on property are mostly daft beyond belief, with unnecessary complexity many other countries don't bother with.

Leaving that aside, one of the first things the owner of a new property normally does - if renting it out - is invest in furnishings.  Is such investment allowable under this new proposal or not?

If the answer is no, it seems to me that this certainly will reduce the desire of many landlords to invest in decent kit for their tenants.  If this were a hotel or B&B, for example, such investment would be fine.

Other than that, getting rid of the ridiculous complexity of the 10% rule is a useful step forward.

 

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14th Oct 2015 11:14

A fairer system?

Aside from the lack of relief for initial purchases, which as far as I can see has not changed and has always been somewhat unfair, I feel that the proposals will certainly help landlords of unfurnished and part-furnished properties.  

As for landlords of furnished properties, what incentive did the wear and tear allowance give them before to spend money on contents? Surely the unscrupulous ones would have just wanted to benefit from the tax relief without spending anyway. The genuine landlords who want to look after their tenants will now know exactly where they stand and if, as often happens, they renew contents in a year when the property is empty for part of the year, they will not lose out by having a low wear and tear allowance due to the reduced rents received.

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14th Oct 2015 11:16

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Excellent article highlighting the logical absurdity that is the tax position on rental properties.

The whole aim of the new rules seem to be to punish landlords for daring to own rental properties.

The disallowance of the initial purchases is going to come as a shock to some landlords and makes no logical sense, as well as no doubt lowering the quality of furnishing bought.

Is that cost then a capital expense and added to the CGT computation if you ever sell it?

Seems like another set of rules designed in an ivory tower where they don't seem to realise that this is actual money landlords spend, and landlords can just magic up more money to pay for it.  So just like mortgage interest, apparently that's not real money you pay out any more, it will be a tax credit.

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14th Oct 2015 12:38

Student letting

One class of landlord that will be heavily affected by the loss of the wear and tear allowance is those letting property to university students.

These landlords will inevitably be offering furnished accommodation and the wear and tear allowance has generally been helpful in this situation.

The rapid change of tax rules is difficult to absorb for owners of large portfolios of student lets.

Consideration of a phased introduction to the change for furnished lettings would be sensible, particularly as this is how the loan interest change is being implemented.

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By JimH
14th Oct 2015 19:27

And at the same time
We also continue to explain to baffled clients why some items don't qualify as revenue deductible 'repair' and alert them to the impending gradual restriction of finance cost deduction and consideration of appropriate planning.

(shouldn't bleat - but the mention in the opening lines of 'having a difficult time' set me off)

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15th Oct 2015 07:34

Carpets?
I agree with previous comments:-
Some sort of tax allowance for the initial furnishing would be fairer.
Abolishing the 10% wear and tear allowance removes the temptation for the unscrupulous to claim that the property is furnished when it is not, or to claim the allowance but not spend money replacing items.
I presume the replacement of carpets is still disallowable but a major expense and I would like to see this addressed.

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02nd Dec 2015 11:56

Carpets & Deposits

I believe the cost of carpets, either initially or replacing, to be disallowable on the basis that it isn't a repair to the fabric of the building and it's capital expenditure ?

I am currently having this argument with a client of mine, who has had to replace a carpet to the tune of £1790, and as he got about £2,400 of the deposit money back for reparations from the deposit holding company, seems to think he can offset the deposit against the cost of the carpet and not count it as income !

Such is the confusion these bizarre rules cause amongst clients and we are left with the unenviable task of trying to explain and somehow justify them !

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