Wear and Tear or Renewals?
Before 1 April 2013 for Companies and 6 April 2013 for other residential property owners, landlords of furnished residential properties had the following options:
- Renewals allowance – claim the cost of replacing items such as cookers, fridges, TV’s etc but not the initial cost or;
- Wear and Tear – deduct a round sum equivalent to 10% of net rent i.e. rent less the expenses usually incurred by the tenant but actually paid by the landlord such as council tax and water rates.
However since 1 April 2013 for Companies and 6 April 2013 for other residential property owners the renewals allowance can now not be claimed where landlords replace items of free standing equipment.
Wear and Tear is normally more generous that the ‘Renewals’ basis and therefore the change is no great loss to most, however this is not the case for anyone renting out a property partly or wholly unfurnished where ‘Wear and Tear’ would not apply.
Repairs
A repair to the property, equipment or furniture is always allowable for tax purposes although previously HMRC’s guidance indicated that the replacement of a fixed item was a renewal and therefore not a repair.
However HMRC have new guidance which states that equipment such as boilers, water heaters, air conditioning systems and fitted kitchen units become part of the property once installed. Therefore when replaced these items would be considered a repair of the building as a whole and not a renewal of the specific item of equipment. Therefore as a repair this qualifies for tax relief.
Outcomes
Landlords who let their property furnished will be able to take advantage of the ‘Wear and Tear’ allowance and receive a tax deduction for the replacement of fixed equipment.
Those with unfurnished properties will be unable to claim a deduction for furniture or equipment and therefore it makes sense to either:
- remove it when there is a change of tenant;
- sell or give it to the tenant so that it is their responsibility to replace it when necessary; or
- become a fully furnished let.