HMRC has announced a consultation on changes to the ‘wear and tear allowance’ applicable to property businesses announced at Summer Budget 2015, which will see the current annual allowance of 10% replaced with a relief based on the cost actually incurred in replacing furnishings.

The new relief will apply to landlords of unfurnished, part furnished and furnished properties, but not to ‘furnished holiday letting’ businesses (FHLs) and letting of commercial properties, because these businesses receive relief through the capital allowance regime.

Under the new replacement furniture relief landlords of all non-FHL residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house.

The list of items for which it will be possible to claim includes movable furniture or furnishings, such as beds or suites, televisions, fridges and freezers, carpets and floor-coverings, curtains, linen, and crockery or cutlery.

Fixtures integral to the building that are not normally removed by the owner if the property was sold would not be included because the replacement cost of these would, as now, be a deductible expense as a repair to the property itself.

The new replacement furniture relief will only apply to the replacement of furnishings. The initial cost of furnishing a property would not be included.

HMRC says that any element of the replacement asset that represents an improvement would be excluded from the relief. The example given in the consultation paper is replacing a washing machine with a washer-dryer. If the washer dryer cost £600, and the cost of buying a new washing machine like the old one would have been £400 then the replacement furniture relief will be £400.

The new relief will apply from 6 April 2016 for income tax purposes and 1 April 2016 for corporation tax purposes.

HMRC says the approach will give relief for capital expenditure to a wider range of property businesses as well as a more consistent and fairer way of calculating taxable profits, since it will be available to property businesses that rent part furnished or unfurnished property.

Landlords will no longer need to be concerned with whether the item being replaced is a fixture (and therefore a repair to the property) or not. In either case, the cost can be deducted from their rental income to arrive at the profits of their property rental business.

In addition, landlords will no longer need to decide whether their property is sufficiently furnished to claim the new replacement furniture relief, as they had to when claiming the wear and tear allowance.

In its impact assessment, HMRC estimates that around 750,000 individuals and some 50,000 partnerships and companies will face an additional administrative burden as they will now need to keep a record of their actual expenditure.

HMRC expects to see an additional £205m raised for the Exchequer in 2016-17, dropping to around £165m annually thereafter.

The consultation closes on 9 October 2015. Click here for details of Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let Residential Dwelling-Houses

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