Replacement furniture relief
By Kevin McDaid, Jun 28 2016 02:56PM
5 April 2016 saw the end of the 10% wear and tear regime for landlords with fully furnished residential property. It also saw the end of the ‘renewals’ regime applicable for landlords of unfurnished or part furnished residential property.
Landlords of fully furnished property could opt to use the renewals regime rather than 10% wear and tear if favourable to them.
10% wear and tear meant that a landlord could deduct a flat 10% from rents received (less any costs paid by the landlord on behalf of the tenant such as for a TV/broadband package) but they could not then claim for the actual cost of renewing furniture.
If the above property did not qualify as fully furnished the landlord in the above example would have had to claim renewals for replacing the TV, meaning that that he/she would have had taxable profits of £4,250, i.e. £250 more than under 10% wear & tear. Note that the landlord would not have been able to claim any relief if the TV was not a replacement.
This is how renewals operated until April 2013. Then HMRC severely limited what could be claimed. In the notes relevant to the property pages for the 205/16 tax return HMRC state:
‘You can claim the cost of renewing small items such as cutlery, but you can’t claim the original
cost of the item or the cost of any improvement. The renewals allowance for the cost of replacing
furniture or furnishings is no longer available’.
Thus, the TV in the above example would not have been allowable. Had it been a kettle costing £20 or so, it would have been allowed.
Consequently, the new the new replacement furniture relief, applying from 6 April 2016, is actually very beneficial to landlords previously unable to claim the 10% wear and tear allowance. For the 10% wear & tear landlords the new regime is unlikely to be heralded as favourable.
A deduction can now be claimed for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:
movable furniture or furnishings, such as beds or suites,
fridges and freezers,
carpets and floor-coverings,
crockery or cutlery,
beds and other furniture
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. Fixtures include items such as:
fitted kitchen units
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.
Landlords of furnished holiday lets are unaffected by these new rules. They will continue to operate the capital allowances regime for the types of expenditure shown above.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
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Replacement Furniture Relief.
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