It may have escaped landlords’ attention that, as from 6 April 2013, HM Revenue & Customs have withdrawn the ‘renewals basis’, which is the concession that previously allowed a deduction for the cost of replacing items used in letting an unfurnished or partly furnished property. A separate ‘wear and tear allowance’ remains available to properties let furnished (see below). There has been some confusion over what means there now are to make a claim for any such expenses for properties not let fully-furnished, particularly in replacing white goods and carpets.
According to HMRC’s guidance, there are now only three ways to claim a deduction against rental income:
- The first of these is for costs incurred wholly and exclusively by the rental business, such as agent fees, insurance and loan interest. The replacement of an asset used in the renting of a property is deemed to be a capital cost and will not be eligible as a rental expense. Only the costs of repairing such assets will be qualify for relief.
There is one peculiar twist to this rule, however. Where white goods, such as fridges, washing machines and dishwashers, are integrated within a property, it will then form a part of the house itself and the cost of replacing any such appliance will qualify for a deduction as it is deemed to be a repair to the property as a whole. Whereas, for example, if a freestanding fridge freezer is replaced, no relief is available.
- Secondly, the cost of replacing ‘tools’ used in connection with the letting of a property will qualify as a deduction. There has been some ambiguity over what will constitute a ‘tool’, which has been defined as ‘implements, utensils or articles’ used in the business. Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More have moved to clarify this point by stating that it will specifically relate to ‘items of a capital nature that are of relatively low value and have a short useful economic life’, such as crockery or rugs.
Furthermore, they have stated that they will not allow the replacement of carpet under this heading as they are a capital item of a higher value which you would not expect to ordinarily replace regularly.
- The final method of relief is to claim capital allowances on the cost of an asset used in the letting business, although this is somewhat unhelpful in this situation given that expenditure on assets used in residential property cannot qualify for capital allowances.
So where does this leave landlords?
In reality, it is unlikely that the withdrawal of this relief will create large annual tax liabilities if the rental income received is comparatively modest. However, this could easily add-up where landlords have a large portfolio of properties which are being rented out.
There is further confusion over the withdrawal of the renewals basis relief in general as, arguably, it has previously been proven under case law that the cost of replacing depreciated assets with
new ones is a revenue expense, and so the renewals basis was never a concession in the first place. HMRC has dismissed this notion although it could, potentially, be open to challenge and remains to be seen whether this interpretation could be taken to tribunal.
Of course, the situation if far more straightforward for properties which are let fully furnished, as a 10% wear & tear allowance is available to cover the depreciation of the assets being provided. Provision of white goods alone will not constitute a furnished property and, broadly speaking, it will need to be let with sufficient furniture, furnishings and equipment for normal residential use to receive this relief. It could, therefore, be worthwhile spending a little more money in providing the requisite furniture to qualify for the 10% wear and tear allowance, rather than potentially receiving no tax relief at all for the costs of replacing items in a partially furnished property.
If you have any queries in relation to the tax matters in letting a property, please contact us to see how we might be able to assist you.