Replacing the wear and tear allowance
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?
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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’.
- 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.
- It will come as a welcome revision for those letting a mixed portfolio.
- 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.
- 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?
- 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?
- 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’.
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.