Tax Insider examines ways in which you can reduce your landlord tax bill. In this issue, he examines the ‘10% Wear and Tear Allowance.’ This is relatively easy method to understand and apply, and relates furnished properties. What is the 10% Wear and Tear Allowance?This allowance was introduced to make lives easier for property investors when they complete their tax returns by allowing landlords to offset 10% of their annual rental income against their property income tax bill.
The allowance is calculated by taking 10% of the next rental received for the furnished rental accommodation. You then deduct charges and services that would normally be borne by the tenant but which in fact, are paid for by you, such as council tax, water and sewerage rates, to find your ‘net rent’. You can only offset 10% of your net rental income for the 10% Wear and Tear Allowance.
What’s classed as a ‘furnished’ property?
The HMRC defines this as a property that is “capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker, etc.”
Effectively, this means that a tenant can start living out of the property immediately and the tenant only needs to provide their own belongings. It’s important to note that the 10% Wear and Tear Allowance cannot be used for partly furnished or unfurnished properties.
You can find a more detailed explanation of furnished property by visiting: www.hmrc.gov.uk/manuals/pimmanual/PIM3200.htmWhat’s the best way to calculate it?
Let’s give you some examples to illustrate how it works: Mr Smith rents out a fully furnished property and receives a monthly rental income of £500. The tenant is responsible for all property bills, for instance utility bills, and services provided to the property, such as gardening. Mr Smith receives an annual rental income of £6,000 and can offset £600 when he calculates his rental profits. In the same scenario, if Mr Smith charges £600 monthly rent - £100 extra - because he pays the ultility and gardening bills himself, his annual income is £7,200. Mr Smith cannot offset 10% against his rental profits. First, he has to deduct the costs that would normally be borne by the tenant, which in this case is £100 per month. This means Mr Smith can only claim 10% on £6,000 (£7,200 - £1,200) which equates to £600.