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.
However, 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.
Calculating the allowance
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.
The replacement furniture relief will apply to landlords of unfurnished and part-furnished properties, as well as to furnished properties. However, it will not be available in respect of furnished holiday lettings. 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. However, a deduction is only available for the replacement cost, not the cost of the initial purchase.
The replacement of the wear and tear allowance by the new relief creates a planning opportunity, making it worthwhile where possible to delay replacing furniture and furnishings until April 2016 or later. This tactic will enable the landlord to claim the wear and tear allowance for 2015/16 and 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 will be available under the new regime.
Harry lets out a full-furnished house. The rent is £800 a month. The tenants meet the cost of utility bills and council tax.
He 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 he undertakes the replacement before 6 April 2016, he will be able to claim the wear and tear allowance of £960 (10% (£800 x 12)) for 2015/16. He will not be able to claim a further deduction for the actual costs of replacing the furniture and furnishings.
However, if he delays making the replacement until after 5 April 2016, he can claim the wear and tear allowance of £960 for 2015/16. It does not matter that he has not actually spent anything on replacements. He will also be able to claim a deduction of £750 in 2016/17 for the actual cost of the replacements under the new relief. Delaying the replacement will save him tax of £300 in 2016/17, assuming that he is a higher rate taxpayer (£750 @ 40%).
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