Landlords of residential property may justifiably be feeling somewhat hard done by right now.
If the restriction to tax relief for interest and other finance costs coming in from April 2017 was not enough, the government is also going to reform how individual and corporate landlords account for the costs incurred in improving and maintaining their properties. The change is set to start from 6th April 2016 (1st April 2016 for companies), although it is currently subject to consultation. The proposal is to replace the wear and tear allowance for furnishings with a new replacement furniture relief.
The wear and tear allowance is 10% of the rent received. For the deduction to be available, a property must be furnished to a level that a tenant could move in and live without having to provide anything apart from their food and clothing.
With replacement furniture relief, landlords will only be able to deduct the costs actually incurred on replacing furnishings – the initial cost of the furnishings does not qualify for relief. However, it will not be necessary for a property to be fully furnished. Landlords will be able to claim a deduction for the cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenants use, such as:
- Movable furniture or furnishings, such as beds or suites
- Fridges and freezers
- Carpets and floor-coverings
- Crockery or cutler
There are a couple of restrictions to the amount that can be claimed. Firstly, relief is reduced by any proceeds from selling the old asset that is being replaced. Secondly, relief is not given for any cost that represents an improvement. For example, if a washing machine is replaced with a washer-dryer, only the cost of an equivalent washing machine will be allowed.
The relief does not cover the replacement of fixtures that are integral to a property. This is because these are already allowed under the existing property repair rules which cover such items as baths, washbasins, toilets, boilers and fitted kitchen units. Furnished holiday lettings are also unaffected because they receive relief through the capital allowance regime.
If you are renting out partly-furnished property, the new relief will definitely be beneficial for you. And if you are planning a refurbishment in the near future, it could pay you to wait until the expenditure qualifies for replacement furniture relief.