In the second part of this two part special report, Arthur Weller will now look more closely at the ‘Renewals Basis’ method. Last month, Arthur discussed the ‘10% Wear & Tear Allowance’ and explained the best circumstances when it should be used.
The renewals basis method can be used for either a furnished, partly furnished, or even an un-furnished property.It allows you to offset the cost of ‘renewing’ or ‘replacing’ an item in a property.
Unlike the 10% Wear and Tear Allowance, there are no restrictions as to when this rule can be used.However, there are some important points to note if you decide to use this method.
a) You cannot offset the initial cost of an item.
This is a very important point, and many landlords get into trouble by accidentally overlooking this.
If you purchase a property and decide to fully furnish it with new or even second-hand items, then you cannot offset the cost of providing these furnishings.You can only offset the costs of these furnishings when you renew them.
b) If you use this allowance, then you cannot change between this method and the wear and tear allowance on a yearly basis.
Here are a couple of case studies to illustrate the use of this rule.
Roy buys a new house and decides to let out his previous main residence.
He leaves the existing furniture in his old house and decides to use the renewals basis method to reduce his income tax liability.
Two years later, he spends £4,000 renewing all the furniture on the property.
This whole amount can be offset against his annual property income tax bill.
More importantly, if by offsetting this whole amount it means that he has made a loss on his property, then the loss can be carried forward into the next tax year.
Alex buys a brand-new luxury apartment in the city centre.
He decides to fully furnish the property and spends £7,000 on ‘kitting it out’ with the best furniture and appliances.
He considers using the ‘renewals’ method, but quickly changes his mind after he realises that the initial cost of furnishing can not be offset against his rental income.
In this section you will learn how you can decide whether you should use the 10% Wear and Tear Allowance or the renewals basis method.
The table below shows which method you can use for the type of property you are providing.
Type of Property
10% Wear and Tear
It is clear from the above table that if you have a partly furnished or an unfurnished property, then you can only use the renewals basis method.If you have a fully furnished property, then you have an important decision to make.
Here are some important points that you should consider before you decide which method to use.
a) Consider the cost of fully furnishing a property.
If you are buying a property and are going to let it out fully furnished, then you must consider the cost you are going to incur in initially furnishing it.
If the cost is going to be high, then it may be better use the 10% Wear and Tear Allowance.
This is purely because
you will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., five to seven years. Therefore you will have to wait this period of time before you can claim the renewals basis.
o If you decide to sell the property before you renew the furnishings, then by using the renewal basis, you will not have managed to offset any renewals cost against your property. This means that you will have unnecessarily paid more in tax.
However, if you use the 10% Wear and Tear Allowance, then you can claim this from the date you purchased the property.
b) Consider how often you will need to replace the furnishings.
If you believe that you will need to renew the furnishings on a regular basis, i.e., every two to three years, then it may well be beneficial to use the renewals basis. This may particularly be the case if you are providing accommodation to students. If you don’t expect to replace the furnishings for at least five years, then the 10% Wear and Tear Allowance may be more suited.
c) Consider administration time.
The 10% Wear and Tear Allowance is easy to calculate and you do not need to keep any receipts for tax purposes.However, if you decide to use the renewals method, then you will not only need to keep all your receipts (as proof that you have incurred an expense), but you will also need to track and record all these expenditures.