Wear and Tear Allowance: attention landlords of residential property

Another UK tax change on the horizon…

What follows is of no relevance if your property falls under the special rules dealing with:
a)  Commercial letting of furnished holiday accommodation.
b)  Rent-a-room

With effect from 6 April 2016, the “wear and tear” allowance will be abolished. However, this is not a message of total gloom. Whilst bad news for those landlords currently eligible for the allowance, the replacement regime will be available to properties unable to benefit from the current allowance. So a case of winners and losers, plus an obvious planning point for all landlords.

The present “wear and tear” allowance is allowed as a deduction against income received from furnished lettings. It is computed as an amount equivalent to 10% of “the relevant rental amount” but is only available if the property being rented is fully furnished. Landlords of properties that are let either unfurnished or partly furnished do not get a “wear and tear” allowance.

Under the new regime, all landlords of residential dwellings will be allowed to deduct the costs that they incur when replacing furnishings, appliances (including ‘white goods’) and kitchenware in the property being let. This change is bad news for anyone currently claiming the “wear and tear” allowance, because actual expenditure on replacement items will usually be less than the deduction presently given for “wear and tear”. However, the change will generally be good news for anyone letting partly furnished residential accommodation.

The important point to note is that the new relief will be given on the basis of ‘like-for-like’ replacements. Obviously a degree of common sense will need to be applied in determining what is ‘like-for-like’, if appliances of the type being replaced are no longer manufactured. However, in situations where the new item represents a major upgrade on what it replaces, deductible replacement expenditure will be restricted to what the equivalent of the old item would have cost. So, if a fairly basic fridge were to be replaced by a ‘top of the line’, plumbed in, larder fridge; the tax deduction is restricted to what a new basic fridge would have cost.

Also deductible will be any incidental costs incurred in either disposing of the old item or acquiring its replacement, for example a delivery charge. Any amount received for the old item (e.g. a trade-in allowance) will be offset against allowable expenditure and thus reduce the deductible amount.

Outside the scope of the new rules will be any expenditure involving what the draft legislation refers to as a “fixture”. In broad terms, that means any plant or machinery that is installed so as to become part of the fabric of the property. What is a “fixture” in residential property includes the boiler and any water-filled radiators which form part of a system intended to heat either water or the interior space of the property.

PLANNING POINT (for all landlords)
Wherever practical, any “replacement” expenditure which will qualify to be deductible under the new rules should not be incurred prior to 6 April 2016.

To discuss this article in more detail, please contact your usual Frank Hirth adviser or connect with us by emailTwitter or LinkedIn.

This article has been written for the general interest of our clients and contacts to stimulate further thought and enquiry. It does not contain answers to specific situations and it is therefore essential to treat it as a prompt to take specific advice on any real and particular issues. We believe that the facts as summarised in this article are correct as at the time of going to press in January 2015. If we discover that the article might be read in a way that conveys a misleading impression (whether by tone, content, error or omission) we will make the necessary changes and draw attention to what has been changed once we become aware of the need to do so. We will not be responsible for any action taken by a reader who relies on the article but does not seek further advice to answer any specific query.

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