More changes to tax rules for repairs and replacements
There have already been some recent changes to the amounts that can be claimed as repairs or replacements for landlords of residential properties but the government is proposing further legislation to be introduced from April 2016.
If we’re honest, the current treatment of repairs and replacements for residential property lettings is all a bit of a mess. The tax relief varies depending on whether the property is let furnished, unfurnished or partly furnished. In addition, another set of rules apply for furnished holiday lets. The new proposals therefore attempt to provide a more consistent treatment (although no changes are proposed for furnished holiday lets).
Partly furnished or unfurnished properties
Tax relief is currently given for the repair of a property, such as repainting the inside or exterior of the property. If an ‘integral fixture’ (see examples below) is replaced, tax relief is also given as this normally constitutes a ‘repair’ of the property. There is currently no relief for the replacement of furnishings. From April 2016, it is proposed that tax relief will be given in all these circumstances.
Examples of Furnishings
•movable furniture such as beds or suites
•fridges and freezers
•carpets and floor-coverings
•crockery or cutlery
•beds and other furniture.
Examples of Integral fixtures
•fitted kitchen units.
Fully furnished properties
Tax relief is currently given for the repair of a furnished property and this also includes the replacement of integral fixtures. In addition, a wear and tear allowance of 10% of the net rent is given to cover the cost of replacement furnishings. From April 2016, the wear and tear element will be replaced with the same relief as described above for partly furnished properties.
How much relief will be given?
The new replacement relief will give relief for the cost of the replacement asset, less any proceeds received from the old asset that is being replaced.
No relief will be given for any furnishings that have not been in the property before and any element of the replacement asset that represents an improvement would be excluded from the replacement relief.
The replacement will include an improvement if the new asset can do more or if it can be used to do something that it could not do before. For example, replacing a washing machine with a washer-dryer is an improvement. If the washer-dryer cost £600, and the cost of buying a new washing machine like the old one would have been £400 then the replacement furniture relief will be £400 (£600 less the £200 that represents the difference in cost between a washing machine and the washer-dryer).
Who are the winners and losers?
Owners of properties which are not fully furnished are clear winners from the changes. As they don’t currently get tax relief for furnishings, it makes sense, if possible, to defer replacement expenditure until 6 April 2016 when relief will then be available.
Owners of fully furnished properties may be winners OR losers depending upon how often, and at what cost, furnishings are replaced. The 10% wear and tear is given whether or not any actual costs are incurred. For this group too it therefore makes sense to defer replacement expenditure until 6 April 2016.
If you would like to discuss your income from property and the tax reliefs available, please contact your RfM advisor.