After 6 April the costs usually claimed under the wear and tear allowance become deductible under a new tax relief. This could be good news for landlords says Blick Rothenberg.
“From 6 April 2016, the favourable 10% wear and tear allowance for fully furnished residential properties will no longer be available,” Robert Pullen, personal tax manager at Blick Rothenberg, said.
“Instead, only the actual costs incurred in replacing furniture, furnishings, appliances and kitchenware provided for the tenants’ use will be deductible. Initial costs are not allowed, only the replacement of such items. The Government expects this measure will bring in around £165m a year from 2017 onwards.”
He added: “This is a significant step away from the wear and tear allowance, bringing the position more in line with the general deductibility of repair costs or replacing toilets, boilers, etc. Landlords of fully furnished properties will feel this change adds additional complexity to an increasingly complicated area of deductible costs, following closely on the heels of the restriction to finance cost expenditure.
“However, the change is good news for landlords of part or unfurnished properties, who will be eligible to claim this new relief. Currently such landlords do not generally receive any relief for such costs (following the changes brought in from 6 April 2014).”
HMRC has promised to provide ‘comprehensive guidance’ on the thorny areas of whether a replacement is an ‘improvement’ or not. Where the asset is replaced to its nearest modern equivalent, the ‘improvement’ as a result of technological upgrades should be ignored so that the cost is still allowed in full.
Qualifying Furnished Holiday Lets and commercial properties are outside of these rules and relief on the initial cost of such items, as well as replacements, remain allowable.
Furnished Properties on Equity Release
If you’re paying cash, you can structure the offer to cover the home and furnishings. However, if you’re financing the purchase, you’ll have two separate transactions – one for the home and one for the furnishings.
A mortgage can’t be used to finance the contents. (A home appraisal only covers the land and structure(s).) You can pay cash or obtain a HELOC (home equity line of credit) for the furnishings.
Inventory all the items you would like and include it in a sales agreement for the goods. (This is separate from the sales agreement for the home.)