Landlords, now that the wear-and-tear allowance is replaced by tax relief, what impact is it likely to have?
From 6 April 2016, the 10% wear-and-tear allowance for landlords of let-out furnished properties has been replaced by a tax relief. This, along with some of the other changes that will impact second-home and buy-to-let property owners, could have a nightmare-like impact on buy-to-let investments and the income made from them, but the replacement of the wear-and-tear allowance with tax relief is not all bad, especially if you’ve planned for it.
Does loss of 10% tax break equal a possible gain in tax relief?
The tax break that allowed landlords to claim tax relief of 10% on their rental income for wear and tear was scrapped on 6 April 2016. The new relief allows landlords of residential properties to deduct the costs they actually incur on replacing furnishings in the property (the initial cost of furnishing a property not included). This only applies to unfurnished, part-furnished, and furnished properties, furnished holiday letting and commercial property landlords cannot claim the relief.Under the new rules, a deduction for the capital cost of replacing furniture, furnishings, appliances, and kitchenware includes:–movable furniture or furnishings, such as beds or suites–televisions–fridges and freezers–carpets and floor-coverings–curtains–linen, and–crockery or cutlery
Cash-in on both using some tax planning
I hope you delayed replacing furniture and furnishings until after 5 April 2016, as right now there is an opportunity for landlords to claim the wear and tear allowance for 2015/16 and a deduction for the actual cost of replacement of furnishings and fittings in 2016/17. Unfortunately, if these replacements were made before 6 April 2016, they will be covered by the wear and tear allowance only, and tax relief under the new regime will not be available.
Fiona lets out a property …
Fiona lets out a fully furnished house at £800 p.m., and has done so for a few years. Her plan to replace fridge, blinds, and dining table, comes in at an estimated cost of £750.Had Fiona made the replacements before 5 April 2016, she would be able to claim the wear and tear allowance of £960 (10% (£800 x 12)) for 2015/16, but will not be able to claim a further deduction for the actual costs of replacing the furniture and furnishings.Fiona did not do this: sensibly, she spoke to her account manager at DNS in January 2016. Her account manger advised her to delay making the replacements until May 2016, specifically so that she would be able to claim the wear and tear allowance of £960 for 2015/16, as well as claim a deduction of £750 in 2016/17 for the cost of the replacements under the new relief. Delaying saved Fiona tax of £300 in 2016/17 (£750 @ 40%).
At DNS we do not put a limit on the number of times you call us to ask advice. Make sure you skim our blogs, and take note of some of the important information we share. If you are thinking of becoming a landlord take note of the rules for landlords about key returns, key dates, expenses and reliefs.
Read earlier blogs related to this subject