Many businesses receive capital allowances to recognise the equipment they use. However, there are no capital allowances for equipment such as beds, furniture, fridges and cookers bought for use in a residential property.
This is not the case for properties which fall within the definition of a ‘furnished holiday letting’ and expenditure on assets which are used in the non-residential part of a block of flats, for example the hallways.
However, for many years HMRC has allowed some tax relief for expenditure on equipment in let residential property. This was by way of a concession.
In simple terms, where a taxpayer lets a furnished residential property, a deduction could be claimed for either:
- a wear and tear allowance of 10% of the ‘net rent’ from the furnished letting, designed to cover the depreciation of equipment; or
- the net cost of replacing a particular item of furniture, but not the cost of the original purchase. This is known as the renewals basis.
Owners of fully furnished lettings have normally opted for the wear and tear allowance. Owners of partly furnished properties could not use the wear and tear route and so used the renewals basis.
A change in April 2011
In April 2011, wear and tear was put into ‘proper law’ but the legislation reaffirmed that the allowance only applies to a dwelling containing sufficient furniture, furnishings and equipment for normal residential use. The renewals basis remained a concession.
Further changes in April 2013
In April 2013 the renewals basis concession was withdrawn meaning that where a dwelling is let ‘partly furnished’ – there are no capital allowances, no wear and tear allowance and no renewals basis.
However, if costs are incurred on equipment and can be classified as a repair, relief will be given for these costs. In some cases, a repair will include the replacement of that item if that item can be regarded as a ‘fixture’ in the building.
Sounds all a bit complicated doesn’t it?
So what is a repair? (According to HMRC)
Classifying whether an expenditure is a repair can be complex and is governed by principles established in a number of tax cases. However, some basic principles apply for all types of repair expenditure.
- The replacement of an entire asset is NOT a repair but if the asset is regarded as a subsidiary part of a larger asset (the building), the expenditure may be a repair. For example, a boiler and radiators installed in a residential property will have become part of the property. Therefore, the replacement of a central heating system would not be the replacement of the whole building and would be a tax deductible cost as a repair of the building.
- If you buy a property to let and have to spend money to get it back into a habitable and thus rentable state then this expenditure is NOT allowable repairs. This contrasts with the situation of rectification work between tenancies which would generally be allowable.
- A significant alteration or improvement is not a repair and will not be allowable. A good rule of thumb is whether the character of the asset has changed. If it has, then the cost is not allowable.
As you can see, there are plenty of grey areas. Good records are essential to justify the tax treatment of repairs if HMRC raise an enquiry into a tax return. Before and after photographs are a good idea!
If a lot of this is leaving you in despair as a Landlord, please do speak to us if you are considering significant expenditure on your rented residential property – we’d be happy to help steer you in the right direction in terms of what you can call a repair and what you can’t. We’re easily accessible on Twitter (on @CliffordTowers) or you are welcome to pop a comment below or give us a call on 01788 577 613 (Rugby) or 01908 564 701 (Stony Stratford).
Image courtesy of: dmitrimaruta / 123RF Stock Photo