If you are a residential landlord and you are in the process of completing a tax return, and have expenses that include a new kitchen and replacing the washing machine in the property. Can these costs be offset against your rental income?

Fixtures or furnishings?

When deciding on the tax treatment of repair and replacement costs in a property letting business, it’s first important to distinguish between costs relating to fixtures and fittings and those relating to furnishings and equipment.

Fixtures and fittings. These are items that are attached to the property and generally can’t be removed without causing damage to it. As a rule of thumb, they are the things that are not normally removed by the seller when the property is sold and would include radiators, light fittings, fitted kitchen units, baths, washbasins, etc.

Furnishings and equipment. These are effectively movable items and include beds, sofas, curtains, carpets and free-standing white goods such as a washing machine or freezer.

Replacing fixtures

The cost of repairing or replacing a broken fixture can be claimed as a revenue expense against your rental income as long as it’s done on a like-for-like basis, i.e. with the closest modern equivalent and not for a superior product.

Pro advice. The cost of a new fitted kitchen replacing a previous, broadly similar, set of units, worktops, sink, etc. would be accepted as a repair expense. If the new kitchen incorporates extra units or additional integrated appliances, e.g. a new extractor fan, then ask the builder for a fully itemised invoice so that you can easily separate out the capital costs when preparing the tax return.

Replacing furnishings

Rather unfairly, capital allowances are not usually available on fixtures, fittings, furniture or equipment in a residential property unless it’s a qualifying furnished holiday let.

Pro advice. There is a loophole for homes of multiple occupancy, such as those shared by students, which contain communal areas, e.g. hall, stairs and landing. These areas don’t count as part of the dwelling house so the furnishings (carpets, curtains, alarm system, etc.) in them qualify for capital allowances. But, unfortunately, a communal kitchen or lounge is considered part of the dwelling house so you can’t claim capital allowances for the equipment and furnishings in these rooms.

Furnished property? Not being able to claim capital allowances won’t be a major issue if your letting the property fully furnished as you can claim the wear and tear allowance instead. This is equal to 10% of the rents received after deducting any charges for services paid by the landlord which would normally be the tenant’s responsibility, e.g. water rates and council tax.

Pro advice. The wear and tear allowance is an alternative (and not in addition) to claiming relief for replacing utensils or repairing furniture.

Partly furnished property

Renewals basis scrapped. Prior to April 2013, even though landlords of partly or unfurnished residential properties couldn’t claim capital allowances or the wear and tear allowance, there was a non-statutory concession which allowed them to claim the cost of replacing a particular item of furniture or equipment with the proviso that no relief had been claimed on the original purchase. The bad news is that HMRC withdrew this concession in April 2013 leaving landlords who supply limited furnishings and equipment with seemingly no tax relief for them.

Pro advice 1. One way to get relief for furnishings is to convert a partly or unfurnished property to fully furnished so that the 10% wear and tear allowance can be claimed. To be furnished, the property will need to have sufficient furniture, furnishings and equipment for “normal residential use”.

Pro advice 2. In response to a joint request from CIOT and ICAEW, HMRC has confirmed that where white goods (cookers, fridges, etc.) are fitted rather than free-standing, they are an integral part of the entire property so the costs of replacing them like-for-like will be deductible repairs.

Renewals allowance

Although the renewals concession has been abolished, this should not be confused with the statutory renewals allowance for replacement “tools”. Therefore, could landlords with partly furnished property use this allowance instead to get tax relief on the cost of furnishings and free-standing white goods?

Low value, non-durable items only. It’s unlikely this would be allowed. HMRC insists that the statutory renewals basis applies only to low value capital items that need to be replaced fairly frequently due to normal wear and tear, e.g. cutlery, crockery, rugs, etc. So carpets, curtains, or free-standing white goods would not qualify.

Pro advice. Contrary to HMRC’s guidance, there’s no mention of durability or low value in the statute which just defines a “tool” as an “implement, utensil or article”. Interestingly, this is the very definition under which, in 1880, the Caledonian Railway Company was able to claim a deduction for its locomotives, carriages and wagons which were certainly not small and very durable. So while it’s unlikely to be cost effective for you to challenge HMRC’s guidance for the tax relief on the cost of one washing machine, if you are replacing furnishings in a large number of unfurnished residential properties, then it may be worth arguing the point.

NB: The cost of a new kitchen which replaces the old one on a like-for-like basis should be fully deductible as a repair. In partly furnished properties, free-standing appliances won’t qualify – but if the cost is significant there may be grounds to challenge HMRC and claim the renewals allowance.