In our last blog we looked at the changing tax environment for buy to let landlords. One of those changes is the ending of the wear and tear allowance from next April.
It is worth spending a few minutes looking at this in a little more detail.
Currently, a wear and tear allowance is available to landlords who let furnished residential accommodation. The allowance is designed to cover the cost of replacing furniture and furnishings and is available regardless of whether the landlord has actually spent any money on replacements in the tax year.
The wear and tear allowance is fixed at 10% of net receipts from the furnished letting. Consequently, the higher the rent, the greater the deduction. Net receipts are the receipts from letting the property less any expenses borne by the landlord that would normally be borne by the tenant, such as council tax and utility bills. The allowance is given as a deduction in computing profits.
In the summer 2015 Budget the Chancellor announced plans to replace the allowance with a deduction for the actual costs of replacement. The new rules will apply from 1 April 2016 for corporation tax purposes and 6 April 2016 for income tax purposes.
The replacement furniture relief will apply to landlords of unfurnished and part-furnished properties, as well as to furnished properties. Furnished holiday lettings have different rules. Under the new relief, landlords will be able to claim a deduction against profits for the cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the property. The relief will cover the replacement cost of items such as beds, sofas, chairs, wardrobes and other pieces of furniture, televisions, white goods, curtains and carpets, linen and crockery, and cutlery. It is important to note that a deduction is only available for the replacement cost, not the cost of the initial purchase.
Is there anything you should do between now and next April?
If you have items that need replacing, then if possible it would be worthwhile delaying the replacement until after 5 April 2016. For 2015/16 you can still claim the wear and tear allowance (if the property is fully furnished) and then claim a deduction for the actual cost of replacement in 2016/17. If items are replaced before April 2016, they will be covered by the wear and tear allowance and no further relief is available.
Sarah lets out a full-furnished house. The rent is £800 a month. The tenants meet the cost of utility bills and council tax.
She plans to replace the sofa, an armchair and curtains in the not too distant future and expects the replacements to cost £750. No further replacements are envisaged before April 2017.
If Sarah the replaces the items before 6 April 2016, she will be able to claim the wear and tear allowance of £960 (10% (£800 x 12)) for 2015/16 but not any further deduction for the actual costs of replacement.
If Sarah delays making the replacement until after 5 April 2016, she can still claim the wear and tear allowance of £960 for 2015/16. In the next year, she will be able to claim a deduction of £750 for the actual cost of the replacements under the new relief. Delaying the replacement will save Sarah tax of £300 in 2016/17, assuming that she is a higher rate taxpayer (£750 @ 40%).
Should you wish to discuss the Wear & Tear allowance in more detail with one of our team, please do call us on .