By Jo White
Tax Consultant, Spofforths
The years 2013 and 2014 saw a few changes to the tax relief that landlords are entitled to in order to streamline the administration, leaving significantly fewer options available.
This is the first of a two-part review to help you manage your lettings more tax efficiently, starting with
A property is regarded as furnished if sufficient furniture, furnishings and equipment for ‘normal residential use’ is provided. In practice, the tenant should be able to use a furnished property without the need to provide any additional furnishings themselves. It is good to be aware that part-furnished properties will be treated as unfurnished for tax purposes.
The biggest change the sector has seen in the last 12-18 months is that, since April 2013, the ‘Non-statutory Renewal’ is no longer available to landlords. Under this clause, a revenue deduction was allowed against property income for the net cost of replacing items such as moveable furniture, white goods, crockery and furnishings fixtures, which needed to apply consistently across all residential properties let by the landlord claiming.
The Wear and Tear Allowance (WTA) is still the main relief for landlords of furnished properties which is calculated as 10 per cent of gross rents, after the deduction of expenses met by the landlord that would usually be met by the tenant (utilities and Council Tax). To claim the WTA, an election must be made by the landlord who first lets the property as furnished and the relief is given as an expense deduction from the property business. It is important to note, however, that if the property is first let unfurnished and then sublet furnished, the tenant can claim WTA and the landlord cannot.
Statutory Renewals basis
The statutory renewals basis is still available although this has limited application to property businesses. The rules refer to a deduction being allowed for replacement of ‘tools’, being ‘any implement, utensil or article’. This has been taken, in the past, as referring to a deduction for small items routinely used in the business, such as light bulbs and smoke detectors.
A statutory deduction is also allowed for the replacement or repair of fixtures in the let property such as bathroom suites, fitted kitchens and central heating systems, provided there is not an element of improvement. The reasoning behind this is that the asset of the property business is the whole property, not just the kitchen, for instance, so a replacement like-for-like kitchen will be treated as a repair and can be claimed as a 100 per cent revenue deduction.
Generally speaking, Capital Allowances are not available in respect of residential properties, however, they may be claimed in relation to expenditure on equipment used to manage the lettings business in order to maintain the properties (lawnmowers, ladders etc.).
Furnished Holiday Letting (FHL) businesses are treated as a trade for tax purposes and relief for expenditure on furnishings is available under the Capital Allowances Code.
It’s either, or…
It is important to note that a property letting business cannot use both WTA and renewals basis; the landlord must elect to use either WTA or renewals basis for all of their residential furnished property lets. So, if a landlord has both unfurnished and furnished lets they could elect for WTA on the furnished lets and claim renewals basis for the unfurnished lets.
Changes are coming
In the Summer Budget the new Conservative Government announced that they will be removing the WTA for furnished properties from 6 April 2016 (1 April 2016 for companies). Instead they will be moving back towards a renewals basis of tax relief.Whilst the proposals are still out for consultation it is believed that the initial cost of any fixtures (including movable furniture, televisions, white goods, carpets and other furniture) will not be claimable but the replacement cost will be.
Spofforths Tax Consultancy Team
Tel: 01403 253 282
Spofforths is a leading independent firm of Chartered Accountants. Its expert team of 18 partners and directors are supported by more than 180 staff members to provide an exemplary level of service to clients throughout the country.