Our accountants have sent the following important tax news to all of their landlord clients. Please take heed and share this information with all other landlords you know.
The End of the Renewals Allowance from 6 April 2013
HMRC have announced that from 6 April 2013 allowances for the replacement of furnishings will no longer be available for landlords. Repair costs will continue to be fully allowable.
The current rules allow full deductibility of both repairs and replacement expenses against rental income in the year the expense is incurred. It is important to make two distinctions here:
Repairs vs. renewals/replacements:
If you replace an old item with a new one, it is quite clearly a ‘replacement’. Repairs costs are routinely incurred for maintenance, but if you spend more than 50% of the cost of an old item when repairing it then it may still count as a replacement rather than a repair.
Integral fixtures vs. furnishings:
‘Integral’ items are of the type that would not normally be removed by either tenant or owner if the property were vacated or sold (for example, baths, washbasins, toilets);
‘Furnishings’ include sofas, tables, suites, beds, cookers, washing machines, dishwashers, carpets, curtains, linen, crockery, or cutlery.
Although repair costs will continue to be fully allowable against income for both integral fixtures and furnishing, from 6 April 2013 allowances for replacements of furnishings will no longer be available.
Wear and tear allowance for fully furnished properties will continue to be available post 5 April 2013
Wear and tear allowance is calculated as 10% of the rent less council tax, water rates, and other services where the rental property is fully furnished. Until 5 April 2013 you can continue to use either the replacement/renewal allowance for furnishings or wear and tear allowance (not both).
From 6 April 2013 the only relief available to residential landlords will be the wear and tear allowance, and this can only be claimed for fully furnished properties, so landlords of unfurnished or partly furnished residential accommodation will not be able to claim any relief at all for replacing furnishings.
Allowance for cost of renewing integral fixtures will also continue
In addition to the wear and tear allowance, the cost of replacing or renewing integral fixtures may also be claimed against rental income. Where expenditure qualifies for this deduction, the following apply:
Expenditure on repair and renewal (including installation) of replacement fixtures may be treated as expenditure on repairs in addition to the 10% wear and tear allowance.
Replacement expenditure may only be claimed if you replace like with like. If a basic sink is replaced with a high end luxury sink, then HMRC will consider it an improvement not a renewal and it will need to be capitalised rather than expensed.
It is also worth noting, that in the case of house in multiple occupation, if the renewal expense is in a communal area such as corridors and hallways, then it is possible to claim capital allowances up to 100% in the year even after 5 April 2013.