Posted by James Pearson on 09 Dec 2013

Wear and Tear Rules: Landlords Letting Income Changes

Under an HM Revenue & Customs (HMRC) concession, up until 5 April 2013 landlords letting out furnished residential properties had the right to claim tax relief for the cost of items such as furniture, furnishings and white goods through either a “wear and tear allowance” or on a “replacement basis”. However, landlords letting out properties which are partially furnished or unfurnished could only use the replacement basis. (N.B., separate rules apply for “furnished holiday lettings”).

To qualify for the concession the property needed to be furnished to a “normal standard” with the landlord providing sufficient items such as beds, armchairs, televisions, carpets, curtains etc., as to allow a tenant to move straight in.

10% Wear and Tear

The wear and tear allowance is based on 10% of the net rents received (i.e. gross rent paid less any costs incurred by the landlord which would ordinarily be payable by the tenant, e.g. council tax).

Under the replacements basis no deduction could be claimed in respect of the initial purchase of an item, but in due course as the furniture/furnishings etc. wore out and were replaced, a full deduction could be claimed for the cost incurred.

Due to its simplicity in terms of reducing the need to keep records etc., the wear and tear allowance has proved popular with landlords with furnished lettings, but in some cases such as where the quality of furnishings etc. was relatively high when compared with the rent charged, the replacement basis was preferable.

Landlords Letting Income

From 6 April 2013 onwards, landlords letting out residential properties can no longer claim a deduction for the costs of replacing furniture/furnishings, etc.  As a result of this landlords with (fully), furnished properties are from this date restricted to claiming the 10% wear and allowance, while those landlords with properties which are not sufficiently furnished will be potentially unable to claim any tax relief in respect of replacement costs.

As a result of this change, landlords letting properties either partially furnished or unfurnished may wish to consider whether it is financially beneficial to let the properties on a fully furnished basis instead.  Also, where the rules regarding repair expenditure have not changed, landlords may wish to consider repairing rather than replacing items.

Contact Tax Innovations

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See also…

Non-Resident Landlords

Residential Landlord Campaign

New Tax Relief on Residential Mortgages

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