It’s a case of out with the old, and in with the new…this time for the Wear & Tear allowance. So, what’s changing?
The old – wear and tear allowance
If you’re a landlord of residential accommodation which you let fully furnished you’ll know that you can claim a tax deduction for wear and tear of equipment and furniture in the property – broadly equal to 10% of the rent you charge. In December 2015 HMRC confirmed that from 6 April 2016 (1 April for companies) this allowance will be replaced with a renewals allowance.
Transition to the new allowance
HMRC wants to keep things it simple (for once) and says there will be no transitional rules. The renewals allowance will simply take effect for 2016/17 and later years.
How will it work?
Unlike the wear and tear allowance, which only applies to fully furnished properties, the new tax deduction can be claimed by any landlord who includes one or more items of furniture or equipment in a property. It will apply to any item which doesn’t become part of the structure of the building – more detailed guidance on this is in the pipeline from HMRC. We expect this will, for example, confirm that the renewals allowance will apply to free-standing kitchen units, but not fitted ones.
Note though – a tax deduction for replacement fitted units should be claimable as a repair cost under the normal rules for working out rental profit.
Purchases – new and existing lets
As the name suggests, the renewals allowance will only be given for the cost of replacing an existing item. Where you let a property for the first time on or after 6 April 2016 and buy furnishings for it, you won’t be entitled to the allowance. Conversely, if you purchase a replacement item which you’ve used in a property let before or after 6 April 2016 you can claim the allowance.
Tip. If you already let a fully furnished residential property you’ll be entitled to the wear and tear allowance as usual up to 5 April 2016 (31 March for companies). Because buying replacement furniture etc. before then won’t get you extra allowances, leave the purchase of replacement items until after 5 April (31 March) as it will then qualify for the renewals allowance.
Selling furnishings and equipment
Where you sell furniture etc. which you replace, the amount of renewals allowance you can claim for the cost of the new item is reduced by the amount you receive for the old item. Also if you incur capital costs in selling an item, say auctioneer’s charges, these can be added to the cost of the replacement furniture etc.
Tip. If you sell an item, which you don’t replace, the amount you receive for it is not taxable and does not have to be declared as part of your income from the rental business.
All Round Accounting Limited
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