10% wear and tear loss affect on furnished?

by Readers Question

8:45 AM, 4th August 2015
About 4 years ago

10% wear and tear loss affect on furnished?

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10% wear and tear loss affect on furnished?

There has been a lot of talk about this allowance being fair game for removal and at first I thought the same. When I read the IR consultation document I suddenly realised some serious consequences and why the allowance had probably been given in the first place. I have written to HMRC as part of their consultation process (link below) as first posted by Mark – thank you.furnished

if rental values for furnished and unfurnished properties is about the same, as it is here in London, then it makes no financial sense to let furnished. Why incur the additional outlay plus time and effort to purchase and the responsibility to maintain, insure and replace. I have 10 places in London and have about £50,000 tied up in furnishings and over the course of a year, spent a fair amount of my time fixing and sourcing white goods and furniture plus disposing of old items. For this I currently receive a tax break of about £6,000 that makes it worth my while. Much less than this and it would not be, loose it all together and I’d be mad to continue renting fully furnished.

So, would the market then compensate by attracting higher rents? In London, It is mostly young professionals who do not have the means or job stability to warrant having their own furniture that want to rent furnished places. I think what we would quite likely see over time is a substantial drop in the amount of furnished property on the market thereby making it harder for this dynamic section of the work force to be dynamic!

As with all changes, there is always a price, I wonder if this one has been thought through?

What do other people think?

Jamie

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447461/150715_Wear_and_tear_condoc.pdf



Comments

Mike W

17:20 PM, 4th August 2015
About 4 years ago

Thanks Jamie for publishing the link. It is a good read. I note the subject is the reform of the W&T allowance applicable to PROPERTY BUSINESSES. My capitals. And the scope of the consultation is intended to improve how residential property businesses are taxed and the measure is designed to improve the fairness in the taxation of residential property.

Also 2.12 To ensure that the W&T relief mirrors as closely as possible, the landlord's economic position ....

Yeah right.
So explain how a PROPERTY BUSINESS is FAIRLY TAXED if FINANCE COSTS are no longer a BUSINESS EXPENSE, and will merely only given a 20% tax relief. And how this aligns with the landlord's true economic position?

Oh and back to W&T allowance. Where exactly in the 'new' fair regime do I allocate my furnishings expense when I first furnish my property? If it is capital then presumably when I sell I can deduct my initial expense from the sale cost (or cost of disposal) of my furnishings? A CGT loss?

money manager

17:22 PM, 4th August 2015
About 4 years ago

Reply to the comment left by "Tony Atkins" at "04/08/2015 - 16:51":

Sounds rather like all that "communication IT" purchased by MPs on expenses that turned out to be TVs and iPads.
We have always opted to furnish as with good tenants the 10% pa would repay the capital outlay in around 26 months but with say a five year life span it was a no brainer. The up front relief is clearly not as good but does at least align the genuine spend and reclaim which helpfully addresses the early replacement following those bad apple tenants.

money manager

17:49 PM, 4th August 2015
About 4 years ago

Reply to the comment left by "Mike W" at "04/08/2015 - 17:20":

Not capital, an income expense so you get the full value upfront just as any other business claiming Annual Allowance.
I have just been told that transitional arrangements are likely to follow the imminent consultation.

matchmade

17:57 PM, 4th August 2015
About 4 years ago

Reply to the comment left by "Mike W" at "04/08/2015 - 17:20":

HMRC has always selectively chosen how to tax property rentals - sometimes they're described as investments, sometimes as businesses.

The only way to make it crystal clear that you own a business and deduct your full interest costs from rent as you claim you wish to do, is to incorporate your rental investments. You (aka the company) will then be saving 20% corporation tax (18% by 2020, supposedly) on a pound for pound basis. Businesses only get a 20% deduction for their mortgage interest business costs, so why are you complaining you are "only" getting a 20% deduction on your personal income tax?

As regards W&T, again businesses have to deduct on an "amount actually spent" basis, so there is a strong argument that individuals running rental businesses should do the same.

Michael Barnes

22:46 PM, 4th August 2015
About 4 years ago

Reply to the comment left by "Tony Atkins" at "04/08/2015 - 16:51":

All expenses are subject to the "wholly and exclusively" rule.

Any personal use is tax evasion.

Any residual value when no longer used in lettings business must be added to income (standard tax rules).

Badger

12:06 PM, 8th August 2015
About 4 years ago

Reply to the comment left by "Tony Atkins" at "04/08/2015 - 16:51":

I would expect HMRC to start talking in terms similar to the ones they use to decide whether an expense incurred by a self-employed person is allowable or not and anticipate them putting up stiff resistance to such practices (if they found out of course...)

David Mensah

0:02 AM, 10th August 2015
About 4 years ago

quick question: I just bought another HMO. Current tenants moving out in Sept, after which I want to replace the furniture which is pretty dire. For my other HMOs I was using the 10% W&T, will I be required to do this for the new property as well?

If yes, it makes more sense to rent it with the current furniture and not buy anything till after April.

Matt Wardman

10:50 AM, 10th August 2015
About 4 years ago

Question:

What happens to treatment of furnishings for institutionally owned student properties - ie those belonging to Universities, aka the competition?

Has that changed, or is the PRS to be made less competitive?

Thanks

Matt

matchmade

11:22 AM, 10th August 2015
About 4 years ago

Reply to the comment left by "Michael Barnes" at "04/08/2015 - 22:46":

Of course: anyone not following these rules would be foolish. Nonetheless, residual prices for second-hand furniture are generally poor, and the first-year depreciation will be extremely high.

Reply to David Mensah: from my understanding of the new rules, you can use 10% W&T in the tax year 2015-16, but from next April you can deduct the full amount of any furniture in the tax year it is purchased. Therefore it makes sense to wait until April.

Reply to Matt: universities may be charities or their lettings may be set up as limited companies, but I would have thought in both cases that they can deduct the full amount of any furniture in the year it is purchased. The 10% W&T allowance only applies to private landlords, who are still treated as "investors" rather than businesses in tax terms. Abolishing W&T seems to be intended to bring landlords into line with practice as regards limited companies, and address the perceived abuse of the rules by landlords who are claiming 10% W&T but rarely actually replace anything.

David Mensah

18:42 PM, 10th August 2015
About 4 years ago

I just read up a bit on the rules, and this corroborates Tony's answer to me:
http://www.taxation.co.uk/taxation/Articles/2013/01/23/298411/wear-and-tear

"This is a once-and-for-all choice. There can be no swapping from one system to the other, and all furnished lets belonging to the same landlord have to be dealt with on the same basis"

I loved the W&T because it was so simple. Keeping track of all furnishings is messy and complicated.

While W&T created perverse incentives to minimally kit out a house and call it "furnished", and then never to renew furnishings, the renewals basis creates its own problems.

You can only claim for renewals, which incentives against buying new furniture after you buy a property.

So, if you convert a house to rentals, it is in your interest to buy old, run-down or damaged furniture that would have once been expensive, but now is cheap. You can then replace it soon with proper furniture.

Similarly, if you buy a tenanted property, it is worth asking the seller to fill it up with old furniture, so that you can soon replace it with like for like, but new instead of old.

etc...

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