Wear And Tear Allowance – Claim It While You Can!

The ‘wear and tear allowance’ is a valuable relief, as it allows landlords of fully-furnished residential properties to claim a deduction in computing their profits for tax purposes to reflect wear and tear on furnishings, regardless of whether the landlord spends any money on replacing furnishings in the tax year.

However, 2015/16 is the last year for which the allowance is available. In his summer 2015 Budget, the Chancellor announced that the allowance is to be abolished and replaced with a deduction for the costs actually incurred, with effect from April 2016. The new rules will apply from 1 April 2016 for corporation tax purposes, and from 6 April 2016 for income tax purposes. A consultation paper setting out the proposed changes was published in July 2015, on which comments were sought by 9 October 2015.

The wear and tear allowance is fixed at 10% of net receipts from the furnished letting. Consequently, the higher the rent, the more the deduction. Net receipts are the receipts from letting the property less any expenses borne by the landlord that would normally be borne by the tenant, such as council tax and utility bills.

The wear and tear allowance is designed to cover the cost of providing items of furniture and fittings, such as:

• movable furniture or furnishings, such as beds or suites;

• televisions;

• fridges and freezers;

• carpets and floor coverings;

• curtains;

• linen;

• crockery or cutlery; and

• beds and other furniture.

However, it does not cover items that are integral to the property itself. Integral fixtures are those that are not normally removed when the property is sold, such as baths, showers, washbasins, toilets, fitted kitchens, etc. The cost of repairing integral items such as these is regarded as a repair of the property itself, and is deductible regardless of whether the wear and tear allowance is claimed.

The wear and tear allowance is only available in respect of residential properties that are let fully furnished. A property is regarded as fully furnished if the furnishings provided are sufficient for everyday use. It is not available for properties that are let unfurnished or partly furnished.

The wear and tear allowance is not given automatically. It must be claimed within twelve months of 31 January following the end of the tax year to which it relates. Consequently, the deadline for making a claim for 2015/16 is 31 January 2018. A claim can be made when completing the property income pages of your tax return.

Don’t forget to claim the allowance. It is a valuable deduction, and you do not need to incur any expenditure on furnishings to be able to claim it.

The allowance is capped at 10% of net rents regardless of your actual expenditure on replacing items of furniture (but see planning opportunities below).

The amount of the wear and tear allowance depends on the level of rental income rather than actual expenditure spent on replacing furnishings. As announced at the summer 2015 Budget, the government proposes to replace the wear and tear allowance with a deduction for the costs that landlords actually incur on replacing furnishings in the property.

The proposed new relief is wider than the wear and tear allowance in that it will be available to landlords who let residential property unfurnished or partly furnished, as well as those letting fully furnished residential property. However, it will not be available to landlords letting furnished holiday lettings, as different rules apply.

Under the proposed new replacement furniture relief, from April 2016, landlords of all residential lets other than furnished holiday lets will be able to claim a deduction for the capital costs of replacing furniture, furnishings, appliances and kitchenware provided by the landlord for use by the tenant. Items that will be covered by the replacement furniture relief include items such as:

• movable furniture or furnishings, such as beds, sofas, tables and chairs;

• televisions;

• fridges and freezers;

• curtains;

• linen;

• crockery; and

• other items of furniture.

Landlords of partly furnished and unfurnished lets will also be entitled to deduct replacement costs from April 2016.

The proposal is to limit the new relief to items provided for the tenant’s use. This limits the opportunity to claim a deduction for capital items which may be used in the property business, such as cars, but which are not provided for use by the tenant.

To claim relief under the new rules, the landlord will need to actually incur the expenditure – the ability to claim a deduction without incurring any cost will cease to be available from April 2016.

Under the current rules, landlords are able to claim a deduction for repairs to the property itself. This includes the replacement of items that are integral to the property, such as boilers, fitted kitchen, units, fitted bathrooms, etc. This relief will continue to be available beyond April 2016. Consequently, no deduction will be permitted for the replacement of an integral feature under the new replacement furniture relief, as a deduction would already be available as a repair to the property itself. 

The new relief is a replacement relief and is just that. This means that no deduction is permitted for the initial cost of the furnishings, or to the extent that any replacement expenditure is actually an enhancement. A replacement will be regarded as an improvement or enhancement if it can do more than the item that it replaced. The example cited in the consultation document is the replacement of a washing machine with a washer-dryer, so that if the landlord spends £600 replacing the existing washing machine with a washer dryer and the cost of equivalent washing machine to the one replaced is £400, the permitted deduction would be £400 (the cost of a like-for-like replacement) rather than £600. The additional £200 spent on the washer dryer is regarded as improvement expenditure and is not allowable.

Under the new rules, no deduction is given for the initial cost or any costs that exceed those for a like-for-like replacement.

The move from the wear and tear allowance to the proposed new replacement relief affords an opportunity to maximise relief by delaying the replacement of furnishings (where this is practicable) to beyond 1/5 April 2016 and by claiming the wear and tear allowance for 2015/16. 

The wear and tear allowance is given irrespective of actual expenditure and is available even if the landlord does not incur any replacement expenditure in the tax year in question. However, under the proposed new rules, relief is only available to the extent that the landlord incurs the cost. Thus, if expenditure is delayed until 2016/17, relief is available by reference to the wear and tear allowance in 2015/16 and for actual cost in 2016/17. However, if the expenditure is incurred in 2015/16, only the wear and tear allowance is available.

Louise is the landlord of a fully furnished residential property. Net rents are £10,000 a year. She wishes to replace the bedroom furniture and expects to spend £1,500.

She claims the wear and tear allowance for 2015/16, which allows her to make a deduction of £1,000 (10% of £10,000) in calculating her taxable profits. If she replaces the furniture in March 2016, no further deduction is available. 

However, by delaying the replacement until May 2016, she is able to claim a deduction of £1,500 by reference to the new relief in 2016/17. If she pays tax at 40%, this delay will save her £600 (£1,500 x 40%) in tax.

The government’s proposed replacement of the wear and tear allowance with a deduction for replacement costs will create the opportunity to maximise relief by delaying the replacement of furnishings until after 1/5 April 2016. Remember to claim the wear and tear allowance for 2015/16.