Renewals allowance disappears for residential landlords

Our recent Livewire highlighted the new Landlord’s Amnesty Initiative being run by HMRC, to catch residential landlords who may have under declared their rental income to HMRC. With the end of the 2013 self-assessment tax return deadline fast looming, it’s important for clients who own rental property to be aware of some significant changes to tax legislation relating to property rentals.

People who rent out residential property offer it either furnished, part-furnished or unfurnished. As landlords will be aware, it is often most attractive for tenants to obtain a property that is unfurnished as they frequently move about and wish to use their own furniture. For that reason, a large number of rentals are offered unfurnished, as it is more straightforward for securing tenants.

In the past, landlords who rented out unfurnished property were allowed to claim for the full cost of replacing existing items such as shower doors, taps or washing machines, using the ‘renewals basis’. On this basis, although the initial cost of an item was not tax deductible, the cost of replacing it was. This allowed the full replacement cost for a ‘like for like’ item to be offset against rental income in the year of purchase.

With effect from April 2013, the renewals allowance has been abolished which means that replacements are no longer tax deductible. Residential landlords offering unfurnished or party furnished properties are especially affected by this change because, unlike commercial property landlords, they are not able to claim capital allowances for the original cost of the item.

Although the cost of replacing assets is no longer tax deductible, the costs of repairing them are tax deductible, which is certainly worth bearing in mind. Of course it may not be financially viable to repair some items once they reach a certain age, and there are some anomalies to the rule, such as a replacement boiler or kitchen units may be classified as a repair and be allowable, because they are deemed to be a repair to the building.

Currently, the only allowance for replacement of items that remains for residential property landlords is the ‘wear and tear’ allowance which is available for fully furnished properties only and entitles the landlord to deduct an annual amount of 10% of the total rental income (less council tax paid) to cover ongoing wear and tear of furnishings. In this context, the definition of fully furnished needs to be understood well; the legislation says the property must have ‘’sufficient furniture, furnishings and equipment for normal residential use’’. In other words, a tenant needs to be able to move in and live without being required to provide anything other than their clothing and food. Whilst ‘’normal residential use’’ is a vague term, in general items such as beds, chairs, tables and an oven are essential, and items such as crockery and cutlery may well be deemed to be essential in HMRC’s view.

Part furnished property does not qualify for the wear and tear allowance although many landlords believe it does. This is quite possibly how HMRC has reached its conclusions that many residential landlords owe taxes, because they have incorrectly calculated their tax liability using the wear and tear allowance.

If you are a landlord and would like to discuss your tax position with us, email Lesley Stalker at las@rjp.co.uk