Renewals Allowance: The New Furnishing Rules for Landlords
There are many things to consider when letting your property, including whether to leave it unfurnished or furnished. This article looks into the tax implications behind both options and analyses the various options available to you as a landlord.
If a property is residential and let fully furnished, landlords can claim a generous 10% wear and tear allowance. According to HMRC, the definition of fully furnished is a property where the tenant can live without having to provide their own beds, chairs, tables, sofas etc. If only nominal furnishings are provided, then it is considered partly furnished and not viable.
Prior to 5th April 2013, (1st April 2013 for companies) landlords of furnished properties had a choice to either claim a 10% wear and tear allowance or claim the renewal allowance for the replacement of moveable white goods. The renewals basis was the only option available for landlords where the property was let partly furnished, providing tax relief for the replacement cost of the free-standing white goods. In 2012, HMRC announced the scrapping of the renewal allowance from 5th April 2013 onwards. This was bad news for landlords of unfurnished or partly furnished properties, as relief would no longer be available for renewing furniture or white goods. It is bad enough that for unfurnished properties, you could not claim for the initial cost of furnishings when first let, never mind now introducing a total ban to relief on replacements.
For all types of properties, a tax deduction can also be claimed as a repair for the cost of renewing or replacing fixtures that are an integral part of the building. Integral items are those which are part of the fabric of the property and can not be removed such as baths, sinks, fitted kitchen, toilets etc. HMRC has confirmed that this does not include free standing white goods.
So where does it leave landlords with partly furnished properties?
Do nothing and bear the extra tax – not very appealing.
Provide fully furnished property and claim the 10% wear and tear allowance as mentioned previously. Obviously as a landlord, you would need to look at the local market conditions to determine if this is actually beneficial to your circumstances. It may well be more profitable for you to let unfurnished and provide the white goods without tax relief.
Repair only and not replace which would be a short term measure as often the cost of repair is just as much as a replacement and the frequency of repairs may not justify this.
Let totally unfurnished and not provide any white goods where possible or inform the tenants they will not be replaced. Depending on the circumstances, you could offer a small rent discount for the tenants to provide their own appliances.
Integrate features as tax relief is still available for white goods if integrated to the property. If you ever replace the kitchen, consider integrating the fridge into the unit, that way it is fixed to the building therefore qualifying for tax relief. Likewise washing machines and dishwashers can be built in to the kitchen as apposed to being free-standing. This route will be more expensive than separate appliances and again as a landlord you would need to look at the bigger picture to determine if this would be more beneficial in the long run.
Property management company as a landlord with a modest or large property portfolio could consider setting up a property company to buy the white goods and rent them to the personally held portfolio at a commercial rate.
Over the past few years, HMRC have increasingly focused their attention on property investors and landlords who it suspects are not paying any or enough tax on their property earnings. Various initiatives and taskforces have been launched with much success as they have identified many landlords who are not compliant in one way or another.
The irony is, many landlords will not be aware of the above changes which come into play for the first time with the completion of their 2013/14 tax returns (in the next few months) and will carry on using the now abolished renewals allowance. Unless care is taken in this and other areas, tax returns will not be correct. As with all tax payers, it is important as a landlord to ensure your tax affairs are structured correctly to mitigate your tax exposure within the changing rules.
For further advice or information, please contact one of our Property Specialists, Shakeel Butt at Shakeel.Butt@wsm.co.uk or 020 8545 7600.