From 1 April 2016 (for companies) or 6 April 2016 (for individuals), those letting residential property will no longer be able to claim a 10 percent wear and tear allowance. Instead, relief can be claimed on the costs of replacing furnishings in let property. The new relief is available to both corporate and non-corporate landlords of residential property, and in respect of expenditure on unfurnished or part- or fully-furnished property. The relief will not, though, apply to properties let as ‘furnished holiday lettings’ or to commercial property lets, both of which are eligible for capital allowances on such items.
Landlords are likely to already be aware of the changes – the Government announced the change last year, following consultation over the summer. The relevant legislation is included in Finance Bill 2016, with the Bill published before Easter containing only minor amendments to last December’s draft clauses. With the relief taking effect this month, though, now seems a good time to recap on some key points.
- The relief is available more widely than the previous wear and tear allowance. Landlords of unfurnished or part-furnished properties can benefit, and should ensure that relevant expenditure is tracked and included on their tax return.
- For those letting furnished residential property who have previously claimed the wear and tear allowance, the record keeping requirements are now more onerous. Wear and tear allowance was taken as a flat-rate deduction against net rental income, so claimants did not need to track specific expenditure. The new relief allows a deduction for the actual cost of replacement assets – so landlords will need to ensure that they retain records of relevant purchases in order for a claim to be made.
- Relief is only available for the replacement of an asset: no relief is available for the initial costs of fitting out the property or where the original item remains in the let property along with the ‘replacement’.
- Significantly full relief is not available when the new asset is not “substantially the same” as the one being replaced. This is a key area to be aware of: where there is an element of improvement or upgrade, the available relief will be restricted to the amount “which would have [been] incurred on an item which is substantially the same as the old item”. Landlords should make sure that they take this into account at the time of replacement and, ideally, obtain contemporaneous evidence of the cost of a like-for-like replacement.
Please get in touch with your usual tax contact if you have any queries on how the new relief could affect you.