Q. I own a number of residential properties which I let fully furnished to a variety of tenants. I have heard that it has been announced recently that H M Revenue & Customs (HMRC) are changing the rules with regards the renewal of furniture and equipment within my properties. Have changes been announced and if so what are they, when do they come into force and how will they affect me?
A. Yes you are correct and HMRC have announced changes to the current legislation. At present tax legislation provides for a deduction for the cost of renewing “trade tools”. The legislation is intended to specifically refer to small items, hand tools such as hammers, chisels and so on, but by concession over a period of time the relief has been extended to any items of plant and machinery.
The current allowance works on the basis that because you cannot claim a deduction for the first purchase of an item of plant, say when fitting out a rental property that you have just purchased, for example there is no deduction for buying, say, a fridge. However when the fridge needs replacing the cost of the replacement can be claimed as a “renewal”. Any sales proceeds from the old fridge are deducted, and the amount claimed must be adjusted to reflect any element of improvement of the new fridge over the old one.
This renewals allowance applies to any trader, but it is particularly useful for landlords of residential accommodation like yourself. This is because, unlike commercial landlords and ordinary trading businesses, landlords of residential accommodation cannot claim capital allowances on plant and machinery provided at the accommodation.
Under current legislation a landlord of a furnished property has a choice: he can claim the renewals allowance, or he can claim a “wear and tear” allowance calculated as 10% of the rent he receives. In some cases the 10% wear and tear allowance works out to be the better option, but in other cases the renewals allowance provides the more tax advantageous route.
Whichever method is chosen has to be applied to all the furnished lettings within a landlord’s property portfolio – one cannot pick and choose between different properties.
The changes HMRC have announced are that from April 2013, the renewals allowance will no longer be available, except for the strict statutory allowance for “trade tools” which in most cases will mean the loss for landlords of a usual tax minimisation tool.
From April 2013 the only relief available to residential landlords will be the 10% wear and tear allowance, and this can only be claimed for fully furnished properties, so landlords of unfurnished residential accommodation will not be able to claim any relief at all for replacing such items as cookers, sinks, baths, and so on.
In terms of advancing planning those landlords who are currently using the renewals allowance should consider whether they should bring forward the replacement of any items they are due to replace in the next few years to replace them before April 2013, in order to claim the renewals allowance while they still can.
It is essential before taking any action to discuss the above with your professional advisor to ascertain how you currently gain your relief under the present options.
If you are unsure on any the points made above, please give the TaxWise Advice Line a call on 01455 852555.