What is 10% Wear and Tear Allowance?
The Wear and Tear Allowance for landlords has changed.
The old Wear and Tear Allowance still applies to the 2015/16 tax year. The existing Renewals System will replace it from the 2016/17 tax year.
Who does the Wear and Tear Allowance apply to?
The Wear and Tear Allowance applies to Landlords who let fully furnished properties. It does not apply to commercial, holiday let, partially-furnished or unfurnished accommodation.
What does ‘fully furnished’ mean?
HMRC’s definition of ‘fully furnished property’ is a dwelling that is “…capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc.”.
If some rooms are fully furnished, but others are less so, then it would not be classed as a ‘fully furnished’ property. Therefore the landlord would not be able to claim any Wear and Tear allowance; there is no option for proportionality here.
What items are included in the allowance?
- Moveable furniture: sofas, chairs, tables, beds, chest of drawers, wardrobes, cooker
- White goods: fridge, washing machine, dishwasher, freezer
- Soft furnishings: linens, curtains
- Flooring: carpets, linoleum
- Everyday essentials: cutlery, crockery
What items are not included?
Anything that would usually be sold with the property, known as ‘integral fixtures’, such as: bath, toilets, fitted kitchen units, central heating system.
How does it work?
This is a comparatively simple calculation: you can reclaim 10% of your net rent from fully furnished homes as Wear and Tear Allowance.
You do this through your Self Assessment tax return, p.SA105 ‘Income from UK Property’, Box 34.
This was a flat rate allowance that could be claimed every year, regardless of your actual spend on furnishings for your properties. Over time, most landlords found this largely evened out to cover expenditure; some years’ outgoings would be higher and other years they would be less than the 10% net rent figure.
Who does the Renewals System apply to?
The Renewals System applied to landlords of fully furnished properties until 2015/16 as an option instead of the Wear and Tear Allowance. From 2016/17 tax year, it is the only allowance available and its reach has broadened to include landlords of unfurnished and partially furnished properties (not just fully furnished).
What items are allowable and not allowable for this tax relief?
This is the same as for the Wear and Tear allowance. It is important to note that this does not apply to the initial cost of new items, only to the replacement of old ones.
How does it work?
Renewals Allowance applications are based on the actual cost of replacing furnishings, furniture and fixtures, on a like-for-like basis. The landlord takes these costs away from their total profits; having first deducted any money made on the sale of the old item and/or adding any disposal costs.
If landlords wish to upscale the new replacement item, they can only claim for the cost of an equivalent item. For example, Laura the landlord decided she wanted to install a better quality cooker than the one she was replacing. She first has to find the like-for-like price and include that in her Renewals allowance claim. The extra £200 she paid for the new, up scaled cooker cannot be included in her claim.
What does the change mean for landlords?
Bit of a ‘swings and roundabouts’ situation really, depending on your position:
- No regular, simple annual 10% calculation, regardless of your actual expenditure (which could have been nothing)
- Wear and Tear allowance is connected to rent, meaning that any rent increases also increased the amount you could deduct.
- Previous allowances only applied to landlords with fully furnished properties – the new system includes landlords of partially furnished and unfurnished. More taxpayers can benefit.
- Extra paperwork for landlords as they must keep track of all purchases and any improved items.
- Fairer calculation of taxable profit as it is based on actual expenditure.
- HMRC consider that the all-encompassing Renewals system applications will “stand up to scrutiny” because of the evidentiary requirement.
- There is still no relief for landlords who buy an empty property and wish to furnish it, as initial costs will still be excluded from the allowance. But if you buy a furnished flat/house and want to completely refurnish it before letting it out, you will be able to claim as this becomes a ‘replacement’ cost.
