Tough rules dictate the tax deductions that landlords can claim against their rental income. They are especially tricky for the cost of equipment you provide for your tenants. What can and can’t you claim for?
What’s changed?
The wear and tear tax allowance, which owners of furnished residential rental businesses could claim for the cost of buying and maintaining furniture etc., was scrapped on 31 March 2016 for companies and 5 April 2016 for other landlords. It was replaced with a new allowance for the cost of replacement of domestic items.
Tip. Unlike the wear and tear allowance, the current tax deduction applies to landlords of partly furnished or unfurnished residential properties as well as furnished ones. However, it doesn’t apply to furnished holiday lets; different tax deductions, called capital allowances, can be claimed for those.
What’s the cost of replacement
The replacement of domestic items deduction doesn’t allow you tax relief when you buy domestic items to set up your residential let. But when you need replacements you can claim tax relief on the entire cost, subject to a few adjustments.
Tip 1. Because you won’t get a tax deduction for the initial expenditure on items, when you first let a property consider buying good quality second-hand items. This means you won’t spend as much on items for which you’ll receive no tax deduction.
Tip 2. You can get around the first-time expenditure if you have other let properties. Replace items with those for which you’ll receive the tax deduction and transfer the used items to your new property.
What purchases does it cover?
“Domestic items” includes things like movable furniture, e.g. beds, free-standing wardrobes, chests of drawers, TVs, etc. Plus basics such as curtains, carpets, crockery and cutlery, and household appliances like fridges and washing machines.
Adjustment – old items
If you sell or scrap the old item that’s being replaced, any costs associated with the disposal can be added to the price of the new item and the tax allowance claimed on the total. However, any money you receive from the sale of the old item must be deducted from the cost of the replacement, which will reduce the tax deduction for it.
Adjustment – new items
The relief only covers like-for-like replacements. So if you upgrade you won’t receive relief for the whole cost.
Example. Your property’s existing fridge is a basic model which cost £199 in 2010. An equivalent replacement would cost £250 in 2020. However, you go for a swish American-style fridge freezer costing £999. The tax allowance you can claim is £250. The additional expenditure of £749 can’t be claimed as it relates to an improvement of the item and not the like-for-like cost. However, if, say, in ten years’ time, you replace the American-style fridge freezer, with an equivalent costing £1,300, the full amount of that expenditure will qualify for the allowance.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.