Tax mitigation now that the 10% Wear and Tear allowance has gone?

by Readers Question

9:06 AM, 2nd April 2017
About 2 years ago

Tax mitigation now that the 10% Wear and Tear allowance has gone?

Make Text Bigger
Tax mitigation now that the 10% Wear and Tear allowance has gone?

This is a really tough one to explain but bear with me, this is the first tax year that we do not claim our 10% wear & tear allowance, but there is still a residual value of “all of the old furniture fixtures and fittings that as sole trader landlords we own personally”.

In short we own all of the old furniture fixtures and fittings but we have not been able to claim a full writing off expense for these items because we have only claimed 10% of the rents previously.

If you produce a schedule of the old furniture fixtures and fittings and place a fair value against these goods then this total value for your whole portfolio can be used as cash introduced into your property lettings business. Of course this is only a cash introduced value and cannot be used as an expense, but any future personal borrowings can now be utilised as an interest expense up to this cash introduced value subject of course to clause 24 interest relief restriction.

This is because you are in effect raising a loan to pay yourself back the cash introduced.

Probably not worth doing for the smaller landlord, but for those with several properties, say a landlord with 10 properties let fully furnished and with a furniture fixtures and fittings residual sale value of £1,000 per property then we now have £10,000 of cash introduced which means the interest on a £10,000 personal loan can now be claimed as an expense (subject of course to clause 24 interest relief restriction).

I believe that this idea can work even better for those landlords who have just incorporated their property portfolio as this cash introduced into a company can now be repaid back before company profits are calculated. Or the company just buys the old furniture fixtures and fittings off the previous landlord owner at a full expense in their limited company business.

For a landlord who has just incorporated and with 10 properties with old furniture fixtures and fittings residual value of £1,000 per property = £10,000 that no company tax has to be paid on.

Let me know what you think, I have suggested this to my accountant and he thinks its ok?

Jim



Comments

Mark Alexander

10:10 AM, 2nd April 2017
About 2 years ago

Hi Jim

Incorporation relief doesn't work like that.

Effectively you exchange equity for shares and offset the value of the shares created against capital gains to wash out CGT.

If your equity is less than the gain you would still have CGT to pay on what is known as "latent gains".

However, if your equity is more than your capital gain you cannot treat the surplus as a Directors loan. The only way around this would be to increase the debt of your business prior to incorporation to balance your equity and capital gain. Naturally, this would release cash. You could then loan this cash to your company post incorporation. Your company could then pay debt back down again. This would leave the company indebted to you by the amount of cash loaned to the company by the Directors.

Capitalising the value of furniture would increase your business balance sheet value but you would have to go through the convoluted process described above to get any value out of it.
.

Jim S

11:46 AM, 2nd April 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "02/04/2017 - 10:10":

Hello Mark,

Thank you for the reply, I have always struggled to understand the incorporation relief and creating Directors loan account and I will read up more on that soon. The chattels of a property transaction are not part of any incorporation relief and that's why they are accounted for separately when calculating stamp duty.

I'm not sure why you can't just introduce a book value/face value for any chattels into a limited company but am I right in saying that you could loan your company £10,000 which then buys your chattels off you for £10,000 and now you have a £10,000 expense in your business which can be fully utilized against tax which means a saving in corporation tax of £2,000? You don't pay any tax on the £10,000 that you personally receive as these were your personal assets that you have sold.

As far as the sole trader landlord now having cash introduced into their lettings business, the idea should work as described in my original question.

Mark Alexander

7:46 AM, 3rd April 2017
About 2 years ago

Reply to the comment left by "Jim S" at "02/04/2017 - 11:46":

Hi Jim

Yes you could do that and it would work as you have suggested.

HOWEVER, there is a BUT, and it is a big one ....

To qualify for incorporation relief you must transfer the WHOLE "business". The only exception is cash. Chattels are very much part of the business, so if you didn't transfer those as part and parcel of the "whole business" then you would invalidate your claim for incorporation relief.
.

Jim S

10:16 AM, 3rd April 2017
About 2 years ago

Reply to the comment left by "Mark Alexander" at "03/04/2017 - 07:46":

Hi Mark,
I'm not so sure that I'd buy into the fact that chattels are a part of the business, at the point of incorporation these assets do not belong to the property business as they are personal assets that the sole trader landlord just lets the property use free of charge. As mentioned they are accounted for separately when calculating stamp duty.

Anyway if they are classed as part of the package for incorporation then this value still needs to be added to the property value for transfer to a limited company and so still has a tax benefit. What a great point to highlight to other landlords who are thinking of incorporating though!

Michael Barnes

13:58 PM, 3rd April 2017
About 2 years ago

Reply to the comment left by "Jim S" at "03/04/2017 - 10:16":

They are business assets, not personal assets.
That is why you have been able to claim the 10% wear and tear allowance against the business income.

Jim S

16:21 PM, 3rd April 2017
About 2 years ago

Reply to the comment left by "Michael Barnes" at "03/04/2017 - 13:58":

Hello Michael,
But the "perceived carried forward writing down value" of the furniture fixtures and fittings that has not gone through it's full life cycle is still left over and not been utilized. If what you say is true and they are a business asset then this residual final book balance needs to be written off in our accounts for year end 2017. Well for the sole trader landlord anyway. Think of it this way, you have spent £20,000 buying new furniture and white goods for your portfolio of 4 top high quality lets on the 6-4-15 and you get to claim 10% of the rents of your portfolio of 4 houses which produce £60,000 per year rent so you claim £6,000 which leaves a PERCEIVED book value for the assets of £14,000 but the next financial year there is no 10% to claim surely you can now claim the full writing off balance of £14,000 as an expense.
I know it's a tricky one but clearly the landlord in this example loses out and that was not what was intended and would not have happened if the 10% of the rents had continued.
Maybe an email to the inland revenue?!

Michael Barnes

17:43 PM, 3rd April 2017
About 2 years ago

Reply to the comment left by "Jim S" at "03/04/2017 - 16:21":

It was the landlord's decision to take the 10% W&T allowance rather than to claim the actual cost.

Presumably the W&T allowance was claimed for the previous years and that more than covered the purchase costs?

The W&T allowance was not intended to cover the original purchase price of the assets, but to cover their subsequent replacement or repair (or decrease in value). I guess (but do not know) that the allowance was intended for people letting out their home for a year or two whilst they worked elsewhere (as it made calculation easy), not for long-term lets as a business.

If your lettings business ends, then the furnishings will be sold, so you will recoup some of that money.

You never have been able to claim for the initial purchase of an item in a residential let (with few exceptions), so you are in no worse a position than someone who claims on renewals; in fact you are in a better position because you have claimed £6000 in addition to the full replacement cost that can be claimed when next replaced.


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

And the landlord vote goes to - ?

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More