Sarah Bradford explores the relief available to landlords when they replace domestic items in properties they let out.
Depending on the nature of the let property, landlords will typically provide domestic items to a greater or lesser degree. It is inevitable that after a period of time, these items will need replacing. When they do, the landlord will be able to claim tax relief, provided that certain conditions are met.
Nature of the relief
The relief for replacement of domestic items replaced the former wear and tear relief from 6 April 2016. Unlike its predecessor – which was only available in respect of furnished lettings – the current relief for the replacement of domestic items is available regardless of whether the property is let fully furnished, part furnished, or unfurnished.
However, this relief is not available for the replacement of domestic items in a furnished holiday let – capital allowances are available instead. Nor is the relief available for the replacement of domestic items where the landlord lets a room in his or her home and claims rent-a-room relief.
Where the relief is available, it applies equally irrespective of whether rental profits are computed on the cash basis or the accruals basis.
Relief is given as a deduction in computing profits for the cost of the replacement item. However, certain conditions must be met.
Initial cost
The initial cost of purchasing domestic items for a property which is to be let out is not a deductible expense – relief is given instead when the item is replaced.
Items covered
- The relief applies to `domestic items’. This will include items such as:
- movable furniture, such as beds, sofas, wardrobes, chests of drawers, tables, etc.;
- furnishings, such as curtains, linens, carpets, rugs, cushions, floor coverings, etc.;
- household appliances, such as fridges, washing machines, televisions, etc.; and
- kitchenware, such as crockery and cutlery.
Conditions
The relief is only available for items that have been provided for use solely by the tenant. The new item must replace the previous item, and the previous item must no longer be available. If the former item remains available, even if it is in a bad state of repair, the new item will be an addition rather than a replacement, and as such the cost will be treated as an initial cost, with the result that relief is not forthcoming.
Replacement not improvement
Relief is limited to like-for-like replacements. Where the replacement is an improvement or upgrade on the item it replaced, the deduction is capped at the cost of purchasing an equivalent to the original item.
As items change and evolve over time, the original model (or an equivalent) may no longer be available when the replacement is purchased – particularly if the original was purchased many years ago. An element of judgement is, therefore, necessary in deciding whether the replacement is an equivalent to the original or an improvement. In making the call, both function and quality should be taken into account.
In their website guidance on the Gov.uk website, HMRC use the example of replacing a sofa with a sofa bed. As the functionality of the sofa bed is different to that of the original, the replacement is not on a like-for-like basis. The sofa bed would be regarded as an improvement on the original sofa – and as such the deduction allowed would be capped at the cost of replacing that sofa with an equivalent sofa. So, assuming the sofa bed cost £800 and an equivalent sofa would have cost £700, the deduction for the sofa bed is capped at £700. The remaining £100 is attributable to the improvement element, and relief for this portion of the cost is denied. However, if at some future date the sofa bed is replaced with a new sofa bed of an equivalent quality, at the time of the later replacement the full costs of the new sofa bed would be deductible; this time, the replacement would be on a like-for-like basis – one sofa bed is being replaced with a new sofa bed of an equivalent quality.
It is not enough to consider only functionality and whether the replacement is substantially the same item as the original. It is also necessary to consider the quality. For example, if a cheap flat pack table was replaced with a superior quality table, again, the deduction would be capped at the cost of an equivalent flat pack table. Likewise, if a cheap synthetic carpet is replaced with a more expensive wool carpet, the deduction would be limited to the cost of an equivalent synthetic carpet.
However, the deduction may escape a cap if the item being replaced is of a type that is subject to rapid technological change, such as a television or other electronic item. The deduction is not capped where the replacement constitutes a reasonable modern equivalent, despite the fact it might offer a significant performance improvement over the original. In this situation, the cost of the replacement is deductible in full. An example of this would be the replacement of an old fridge with a modern fridge with an improved energy rating. If both were (say) mid-range appliances of a similar size and brand, the full cost of the replacement fridge would be deductible. Taking into account technological advances, the replacement would be regarded as being on a like-for-like basis.
So, as a rule of thumb, if the replacement is equivalent in both functionality and quality to the original, the cost of the replacement can be deducted in full. However, if the replacement is superior to the original, either in function or quality, the deduction is capped at the cost of a like-for-like replacement.
Other costs
There may be other costs to take into account when replacing a domestic item, such as the cost of disposing of the original item or the cost of delivering the new items. These will be reflected in the amount of the deduction.
The need to cap the deduction at the cost of a like-for-like replacement will mean that if a landlord upgrades the domestic items in a let property in a bid to increase the rental income, the full cost of the superior replacements will not be deductible.
Proceeds of disposal
If the old item is sold, the proceeds from disposal must also be taken into account in working out the amount of the deduction. If the old item is part-exchanged for the new item, this too will also impact on the amount of the deduction.
Calculating the deduction
As it is necessary to reflect incidental costs of acquisition or disposal, and also any proceeds received from the sale of the old item, the allowable deduction is calculated as follows:
- the cost of the replacement item (capped at the cost of an equivalent modern replacement on a like-for-like basis); plus
- any incidental costs of acquiring the new item or disposing of the old item; less
- any amounts received on disposal of the old item or allowance given in part-exchange.
Example: Replacing fridge with fridge-freezer
Joe has a number of properties, which
he lets partly furnished. The fridge in one of the properties stops working and
Joe orders a fridge-freezer online as his tenants have asked for a freezer. The
fridge-freezer costs £400. Had Joe replaced the fridge with an equivalent
fridge, this would have cost £250. He pays £15 to dispose of the old fridge and
£10 for delivery of the new fridge.
The amount he can deduct in computing his profits is calculated as follows:
£
Cost of fridge freezer - capped at cost of an equivalent
fridge 250
Cost of disposal of old fridge 15
Cost of delivery of new fridge 10
Permitted deduction 275
Although he spent £425 in total, Joe is only allowed to deduct £275 in respect of the replacement of the old fridge with the new fridge-freezer. The difference between the cost of the new fridge-freezer and a fridge equivalent to that being replaced (£150) does not qualify for relief and this element of the cost cannot be deducted, as it represents improvement expenditure.
Practical Tip:
To ensure that the cost of replacing domestic items is fully deductible, the replacement must be on a like-for-like basis.
