Question: My existing tenant has just handed in their notice and I want to carry out some works to the property before the new tenant moves in. What should I be aware of from a tax perspective?
Repairs and routine maintenance costs are generally allowable for tax purposes. However, over the last few years’ changes have been made to the tax rules surrounding such expenditure which can lead to confusion.
Repairs are allowable for tax purposes where they have been incurred for the purpose of the property letting business. There is no statutory definition of a repair, but it is the restoration or replacement of a part of the building rather than the whole building at one time. A repair is when you replace something ‘like for like’, including replacing items with the modern day equivalent. Replacing wooden with UPVC windows, or replacing bathroom suites and kitchen units on a ‘like for like’ basis are examples of this. General decorating and maintenance costs are also considered repairs.
Improvements are not deductible against rental income. These go beyond a repair and can include the construction of a conservatory or the conversion of loft space into additional bedrooms. If you purchase a property in a derelict state any repair works are treated as improvements so cannot be deducted against your rental income.
Up until 6 April 2016, a landlord providing a fully furnished property was also able to claim a 10% Wear and Tear Allowance (WTA) as a deduction against their annual rental profits on qualifying properties. WTA was calculated based on gross rents (less council tax and water rates if paid by the landlord) and covered the cost of providing and replacing moveable furniture, TVs, carpets, white goods, crockery etc.
As an alternative, landlords providing such properties were able to claim under the Statutory Renewals basis for the cost of replacing ‘tools’ with the initial cost of such items not deductible. ‘Tools’ for this purpose was very limited and only covered light bulbs and smoke detectors etc.
Since 6th April 2016, all landlords (providing furnished or unfurnished accommodation) now have to make a claim under the new renewals basis. To qualify for a revenue deduction you must have a residential property business and be replacing furniture, furnishings, household appliances and kitchenware that were already in use at this date.
Under the new rules landlords providing furnished lettings will lose out on tax relief, however those providing unfurnished properties can now claim for the replacement of items such as white goods, which they couldn’t before now.
For further information or guidance on property maintenance tax please contact Jo White on 01403 253282 or email firstname.lastname@example.org.
Spofforths is the trading name of Kreston Reeves LLP