9th July 2013 by Simon Misiewicz
Do you rent out furnished properties?
Are you claiming for wear and tear allowance?
As many of you will be aware that residential property owners are unable to put through capital allowances on the following expenditure (2):
- Fixtures and fittings
- White goods
- Televisions, videos, WIFI equipment
- Carpets and floorings
- Curtains, linen and soft furnishings
- Crockery and cutlery
As a result many property investors and landlords may feel aggrieved that they cannot put these costs through their tax return.
Fear not as there is an alternative.
Wear and tear allowance
People that rent out their property are allowed to claim for "Wear and tear". The wear and tear allowance is equal to 10 per cent of the net rents after deducting charges or services that a tenant would usually bear but which are, in fact, borne by you (such as Council Tax) (1).
Wear and tear example: Johnny buys a property (HMO) and rents it out to 5 students. The furniture, communal areas and white goods cost a total £6,000. As it is a student let, there is no council tax to consider. Johnny charges £250 per calendar per month, excluding bills per student. He therefore receives a total rent of £15,000 per annum. As he can claim 10% of the net rent (still £15,000) he can claim £1,500 per annum. Admittedly this will take circa 4 years before the total £6,000 is covered. However if the property is maintained in good order, then Johnny may actually profit after years 5,6 or 7, depending on the cost of repairs and renewals.
Where a taxpayer claims that the 10% allowance is inadequate, you should say that HMRC is only prepared to give this concession on its own terms. It is always open to the taxpayer at the outset to adopt the renewals basis instead. In other cases the 10% allowance may seem over-generous, but you should not seek to restrict the deduction for that reason (2).
Calculating wear and tear allowance is much easier than calculating the replacement cost of repairs and renewals as you do not have to track the assets you have purchased. If you utilise the repair charges then it may be more contentious and open to debate with HMRC, which could take a lot of your valuable time for a few pounds here and there.
The problem is further exacerbated in that whatever basis is chosen must be applied consistently. It is not possible to chop and change depending on which method gives the higher deduction.
10% wear and tear plus renewals (integral fixtures and fittings)
No one said that the interpretation and word usage by HMRC is clear, in fact I would say confusing. Albeit you cannot claim 10% wear and tear allowance in addition to renewals of furniture, you can claim for renewals on fixtures integral to the building. Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold. For example, baths, washbasins, toilets, central heating installations. Expenditure on renewing such items is normally a revenue repair to the building. It is due even though the 10% wear and tear allowance has been deducted (2).
But a taxpayer cannot deduct (2):
- the original cost of installing these fixtures,
- the extra cost of replacing a fixture with an improved version; for example, where a worn out, but basic, cheap bathroom suite is replaced with an expensive, high quality suite; they can only deduct the cost of replacing like with like.
The original cost of installation means either:
- the cost of installing the assets for the first time in a new property, or
- the cost of replacing worn out assets in an old property that has been bought to let, or
- which you are converting to let.
Repairs and renewals example: Malcolm replaces a washing machine in a flat he lets. He sells the old washing machine for £20 and buys a washer dryer costing £559 to replace it. The cost of buying a new washing machine, like the old one would have been £399. Malcolm deducts from the £559 both the £20 received for the old machine and the £160 that represents the difference in cost between a washing machine and a washer dryer. His renewals deduction is therefore £379 (2).
The landlord is also entitled to claim a deduction for the cost of replacing such items, less any proceeds received for the sale of the original items. As with the renewals allowance for furniture, the deduction is limited to replacing like with like and does not cover the cost of the original item (5).
But what about holiday lets?
A holiday let is considered to be (3) & (4)
- The accommodation must be available for commercial letting to the public generally as holiday accommodation for not less than 140 days.
- The periods for which it is let must amount (in the aggregate) to at least 70 days.
- For at least seven months the property must not normally be in the same occupation for more than 31 days.
- 'Commercial' is defined in ICTA88/S504 (1)(a) and ITTOIA05/S323 (2) as meaning 'let on a commercial basis and with a view to the realisation of profits'. Take a reasonably broad view. Close season lets, may produce no profit, but normally contribute towards the cost of maintaining the property. You may normally regard such a letting as commercial. On the other hand, do not accept as a commercial letting to friends or relatives at zero or nominal rents.
- Accommodation is 'furnished' if the tenant is entitled to use of furniture. We would expect sufficient furniture to be provided for normal occupation. In practice, with holiday lettings, problems about whether the accommodation is furnished are unlikely to arise.
- The words 'holiday accommodation' are not expressly defined. In general, if the other conditions are met, accept the lettings as being of holiday accommodation. If, exceptionally, you think the legislation is being abused, make a report to CTIAA (Technical) before you list any appeal for a contentious hearing.
As such holiday rentals are considered a trade and may therefore claim capital allowances (2).
If you would like to discuss how you can make your property portfolio more tax efficient call Simon on the below number and quote "Tax" this month and he will give you a free review.
For more information please contact us on 0115 946 1991 or contact Simon on firstname.lastname@example.org or visit our website to see what we do www.optimiseaccountants.co.uk