Changes to Wear & Tear Allowance – Furnished Residential Rental Properties

07 March 2016 11:30

The Government previously announced that they are abolishing the current Wear & Tear allowance, currently available to fully furnished residential rental properties. Based on the current system, a flat rate 10% allowance of rental income (less certain expenses such as ground rent) is given as a deduction from rental income.

As with most changes to tax legislation, there will be winners are losers.

The W&T regime was very beneficial to landlords, as there was no statutory definition of furnished, so tax payers took advantage of this. Furthermore, the 10% allowance was quite often greater than actual expenditure, as it was available to claim even if no such expenditure was incurred during the year.

As from 6 April 2016, the W&T allowance will be abolished and there will be a return to the “renewals” basis. This means the initial cost of purchasing capital items (e.g. furniture) is not allowable, but the replacement cost will be. The new relief will cover the cost to replace moveable items provided for the tenants use, such as furniture, TV’s, carpets, linen, etc.

The new relief does not cover items integral to the building, such as baths, fitted kitchens, boilers, etc. The reason (or argument!) is the replacement of such an item is deductible as a repair to the property itself. For example, replacing a broken boiler is repairing the homes heating system.

So what can be done?

Firstly, if your rental property is currently furnished, ensure you claim the W&T allowance during the 2015/16 tax year.

If you are considering refurbishing the rental property, including replacing furniture, carpets, etc, you may wish to postpone the expenditure until after 6 April 2016.

If you are purchasing a rental property, you may wish to leave any old furniture in place, so that you can claim the replacement cost. Remember, if there was no furniture, then the initial cost will not qualify for relief.

The winners of the change will be those with rental properties that were only partly furnished and did not qualify for W&T allowance. The big losers will be those with fully furnished rental properties, who do not replace furniture frequently.

If you have any queries on how the changes will impact you, feel free to contact us to arrange a FREE initial meeting.

Want to make sure you keep up with future changes to legislation? Take a look at our Property Accounting Services to find out how you can avoid missing out.

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