Wear and Tear Allowance – the last hurrah?

As we have reported in a previous article (http://www.cliveowen.com/tax/news/stop-press-%E2%80%93-landlords-must-read) there are significant tax changes being introduced which affect landlords including the restricted loan interest relief, the recently announced stamp duty land tax charge and the least mentioned, the abolishment of “wear and tear” allowance from 6 April 2016.

“Wear and tear” allowance is a tax deductible cost where a landlord lets out a property, fully furnished. By fully furnished, this means that all of the furniture required by the tenant to live in the property is provided by the landlord, such as a sofa, bed, fridge, TV, cooker etc.

The idea of the allowance is to give tax relief for the cost of white goods and furniture which is not available under the capital allowances legislation. The amount of the allowance is broadly 10% of the gross rental income, so this can be of a particular advantage to a landlord in certain circumstances, particularly where the rental income is high but the cost of such items is low. However, HMRC have now determined the allowance is too generous and it should be abolished. In its place will come a relief which simply allows the cost of replacing such items on a like-for-like basis.

Whilst this is generally bad news, those landlords with current fully furnished properties or seeking to buy such properties, may have an opportunity.

If you are a landlord with a fully furnished property that perhaps needs an upgrade, you should consider delaying the expenditure until after 6 April 2016. This allows you to qualify for the “wear and tear” allowance for 2015/16 and then once the replacement furniture has been bought, after 6 April 2016, you will be able to claim a tax deduction for the cost of the replacement furniture as the “wear and tear” allowance will no longer exist. If you buy the furniture prior to 6 April 2016, no relief will be available for the actual cost of the replacement furniture as it will be deemed to be covered by the “wear and tear” allowance.

Secondly, if you are considering buying an empty property and furnishing it from scratch, you will get no tax relief for the initial cost of the furniture, under the new rules as relief is only given when the items are replaced. However, if you buy an existing buy to let property with worn out furniture and replace this when you own the property, you will obtain a tax deduction for the costs of replacing the worn out furnishings.

If you wish to speak to a member of our tax team, then for Darlington call Alan Moore or Lee Watson (01325 349700), for Durham call Nicola Bellerby (0191 384 2244) and for York call Alan Moore or Graham Richardson (01904 784400).