Letting expenses – bring on the replacements

Since April 2016 residential landlords have been entitled to a new tax deduction when they buy domestic items for their properties. It has a wider effect than the wear and tear allowance it replaces, but will it make you better off?

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 new 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 apply to those.

How it works

Under the new scheme you won’t receive 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 (see below).

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 in those for which you’ll receive the new 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 2005. An equivalent replacement would cost £250 in 2016. 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.

Because the new allowance additionally applies to unfurnished or partly furnished properties, these landlords are likely to save tax as a result of the new regime. Conversely, landlords of furnished properties are unlikely to be better off.