Announced in the Summer Budget of 2015, the government is introducing significant changes to how UK landlords can cover the cost of repairs and replacing items in their properties.
As a quick overview of the changes; the existing wear and tear allowance which allowed landlords of furnished properties to write off 10 per cent of their rental profits for notional wear and tear, regardless of whether those repairs had taken place, is being replaced by a more widespread tax relief.
Crucially, the previous allowance enabled landlords to reduce their tax liability, even when the property had not been improved.
Now applicable to furnished, unfurnished and part-furnished rental properties, the new relief allows all landlords to deduct the cost of replacing furnishings in a let property.
Covering the capital cost of replacing items intended for tenants’ use, such as beds, white goods, and flooring, it does not cover the initial cost of furnishings only their replacements, nor does it include fixtures that are classified as being integral to the building, for example baths, fitted kitchen units and boilers.
At first glance, the new tax relief appears a fairer system than the wear and tear allowance, since it does not discriminate between let properties that are furnished versus those that are unfurnished.
Plus, by providing tax relief on actual spend, rather than receiving 10 per cent relief even if no repairs are made, it should arguably encourage more landlords to replace items in let properties more regularly.
However, as with all tax changes, there are inevitable anomalies, and those that will not welcome the amendments. Landlords who predominantly have furnished properties and who were consistently claiming the wear and tear allowance, whether they made the repairs or not, will likely see their relief, and perhaps their income reduced overall.
Also, while a landlord buying an empty property and equipping it from scratch will receive no tax relief under the new rules, a landlord buying an existing buy-to-let property who replaces the existing furniture almost immediately after purchasing it will qualify for replacement relief under the new scheme.
With this in mind, the incentive for landlords to buy good quality furniture when they initially furnish a let property is considerably lower than before, since the cost cannot be reclaimed as relief, yet replacement furniture and furnishing could be.
It could also lead to an increase in rents for those landlords who fare the worst from the changes and who see their overall income reduced. Plus the administrative burden for proof of purchase and claims could prove prohibitive for landlords, and see those that are less onerous at keeping records and receipts lose out.
Timings are crucial here too; any landlord contemplating a refurbishment programme which would incur substantial expenditure to replace furniture, furnishings and household appliances for their let properties, may wish to defer this activity until after April 2016.
Landlords could still claim their 10 per cent wear and tear allowance for the year to April, again even if no capital expenditure was made. Then, after April, the new replacement expenditure would enable the new purchases to qualify for tax relief in 2016-17.
As the new relief is based on a ‘like-for-like’ basis, it also does not allow for upgrading or improving the quality of appliances, for example. A degree of subjectivity and common sense will obviously need to be employed if appliances of the type being replaced are no longer manufactured.
When a landlord does upgrade an item, for example an oven, under the new rules the deductible replacement expenditure will be restricted to the equivalent cost of the old item, not the full cost of the new one.
Again, this seemingly disincentivises landlords from upgrading or improving furniture and furnishing, meaning tenants could potentially lose out too.
As a side note, any incidental costs incurred while either disposing of the old item, or acquiring the new one, such as delivery costs, can be deducted, plus any amounts received for the item, for example a trade-in allowance, are offset against the tax relief.
Overall, the new tax relief evens out the playing field for landlords, whether they chose to furnish, part-furnish or let a property as unfurnished. Also, some would argue that claiming for actual expenditure, rather than that which may not have taken place, is also a more responsible system. The drawbacks are arguably the higher administration burden on landlords to keep records of the relevant purchases to claim the relief, and the reduced incentive to buy quality items for a first time let, meaning the benchmark is set for that property for life due to the like-for-like replacement policy.
*This article was written by Adam Owens, senior property tax advisor, tax planning and investment specialist OneE Group.