For many years it has been possible to claim a `wear and tear’ allowance in respect of furnished lettings. The relief was originally available on a concessionary basis (former HMRC extra statutory concession (ESC) B47), but was placed on a statutory footing from 6 April 2013. The statutory relief applies for 2011/12 and later years for income tax purposes; and from 1 April 2011 for corporation tax purposes.
Nature of the relief
The wear and tear allowance provides an option for landlords to claim a statutory amount for the cost of replacing and repairing furniture and furnishings. The opportunity to elect for the wear and tear allowance is only available in respect of furnished lettings. It is not available in respect of unfurnished properties, even if the landlord provides some items, such as curtains or white goods.
For the purposes of the allowance, a property is regarded as being let furnished if it is let with sufficient furniture for normal every day residential use.
Tip:
The wear and tear allowance is available regardless of whether any items have been replaced in the year.
What is covered?
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 which are integral to the property itself. Integral fixtures are those that are not normally removed, such as baths, showers, washbasin, toilets, fitted kitchens, etc. Integral fixtures are not normally removed when the property is sold.
Calculating the allowance
The allowance is calculated by taking 10% of the receipts from letting the property, which are taken into account in calculating the profits of the property rental business, less any expenses which would normally be borne by the tenant. This would include expenses such as council tax and utility bills.
Example 1 – Jack claims wear and tear allowance
Jack lets a property fully furnished. The rent is £1,000 a month, which includes council tax of £100 a month. Jack elects to claim the wear and tear allowance for the tax year in question. The allowance is calculated as follows:
Rental income
12 x £1,000 £12,000
Less: Expenses normally borne by tenant
Council tax
12 x £100 (£1,200)
Net rents £10,800
Wear and tear allowance @ 10% £1,080
Jack can claim a wear and tear allowance of £1,080.
Manner of relief
Where the wear and tear allowance is claimed, relief for the allowance is given as a deduction in computing the profits of the property rental business.
Claiming the allowance
The allowance must be claimed. It is not given automatically. An election must be made for each tax year for which the allowance is to apply. The legislation does not specify how the election must be made and there is no special form for the purpose. Instead, HMRC will accept that an entry in the wear and tear allowance box on the tax return is sufficient notice of the election (see HMRC’s Property Income manual at PIM3215).
However, there is a time limit for making the election, which is one year from the normal self-assessment filing date for the tax year in question. This means that the deadline for making a wear and tear allowance for 2014/15 is 31 January 2017.
Tip:
If you forget to claim the allowance when doing your tax return, all is not lost as you have until the following 31 January to make the claim. This can be done either by filing an amended return or by writing to HMRC.
Removal of the renewals basis – the ’white goods’ problem
Under the old concessionary basis, taxpayers were offered an alternative to the wear and tear allowance, in the form of the renewals basis. The renewals basis was contained in a separate concession (ESC B1) and provided relief for the net cost of replacing a particular item of furniture. If taxpayers chose the wear and tear allowance, they could not then claim a deduction for the actual cost of replacing the assets. It was one or the other.
Prior to the introduction of plant and machinery capital allowances, the renewals basis concession extended the narrow statutory renewals basis (now found in ITTOIA 2005, s 68) to plant and machinery outside the confines of the renewals allowance allowed by statute. The concession remained in place after the introduction of plant and machinery capital allowances, until being withdrawn with effect from 6 April 2013.
The renewals allowance was also available in respect of properties that were let unfurnished. Landlords letting furnished and unfurnished property cannot claim capital allowances (although the rules for furnished holiday lettings do permit capital allowance claims). Consequently, the withdrawal of the renewals basis presents a number of problems.
As far as landlords of furnished lettings are concerned, the removal of the renewals basis options means that the taxpayer is no longer able to choose whether to claim the wear and tear allowance or the cost of renewals, according to which was most beneficial. Consequently, if the cost of replacing items of furniture in the tax year exceeds the 10% of net rents permitted by the wear and tear allowance, no deduction is available for the excess.
Example 2 – Cost of replacing items exceeds 10% net rents
Lucy lets out a flat. The flat is let furnished and net rents are £1,250 per month. During the year, Lucy spends £3,000 replacing items of furniture and furnishings.
She is able to claim a wear and tear allowance of £1,500 (10% (12 x £1,250)). However, she has spent £3,000 on replacing items and under the statutory basis is unable to claim relief for the remaining £1,500.
The removal of the renewals basis also presents a problem for unfurnished lets, as the old concessionary basis for renewals was not limited to furnished lettings. It also applied to unfurnished lettings, allowing a deduction to be claimed for the net cost of replacing items such as white goods that may be provided in an unfurnished or partly-furnished property.
The statutory deduction for renewals is limited to items such as small tools which are replaced frequently. In a letting context, this would only apply to items such as cutlery if provided.
Possible solutions
For furnished lets, relief is available to the extent permitted by the wear and tear allowance. Consequently, one option is for landlords of unfurnished properties to let them furnished instead. However, this may be a case of letting the tax tail wag the commercial dog, and the extra costs of providing furniture etc., may not be covered by the tax savings and any additional rent received.
Where an item is fixed or is an integral feature, the replacement of that item may be treated as a repair to the whole asset that is a house. However, the repair route is not an option for items that are freestanding, such as white goods, as in this case it is the whole asset (i.e. the white good) that is being replaced rather than a part of a larger asset. This constitutes capital expenditure and the lack of availability of capital allowances means that landlords are not able to obtain relief for the costs involved. Where a landlord has a lot of unfurnished properties, the lack of tax relief could significantly increase costs.
Landlords may wish to consider whether they only provide tenants with the bare minimum or whether any additional rent they can charge compensates for the lack of tax relief.
Trap:
Landlords letting unfurnished property can no longer obtain tax relief for the cost of white goods.
Tip:
Don’t let the tax tail wag the commercial dog – look at the overall position in deciding whether it remains cost-effective to provide white goods in unfurnished lets.
Practical Tip:
Where property is let furnished, remember to claim the wear and tear allowance.
