10th March 2016
The renewals basis that was previously available to landlords by concession was withdrawn from 6 April 2013. The renewals basis was more generous to landlords in situations where the property was not let fully furnished than the wear and tear allowance part of the concession which was brought within the legislation. In particular, HMRC would allow claims for expenditure on appliances, carpets etc made by landlords of properties that were essentially unfurnished.
The flat rate 10% wear and tear allowance for landlords of fully furnished residential property is to be withdrawn with effect from 6 April 2016. This is to be replaced with a new “renewal basis”. The new allowance will allow landlords of all residential property, whether furnished or unfurnished, to claim a deduction for the replacement of assets provided for use by the tenant of a residential property, such as furniture, furnishings, appliances and kitchenware. Four conditions will need to be met:
A: The property being let out is a dwelling house.
B: A domestic item has previously been provided for the tenant’s sole use in that dwelling house and expenditure is now incurred in replacing the item.
C: The expenditure is incurred wholly and exclusively for the property business but a deduction would otherwise be prohibited due to the item being of a capital nature.
D: Capital allowances may not be claimed on the expenditure.
So, the main points to note are:
- No deduction is allowed for initial expenditure.
- A domestic item includes furniture, furnishings, household appliances and kitchenware but does not extend to fixtures (e.g. the central heating system). The replacement of such fixtures on a ‘like for like’ basis is already allowed as a repair cost.
- The relief is available for a ‘like to like’, replacement so any improvement expenditure cannot be claimed until the improved asset is replaced. Earlier HMRC guidance indicated that, in the event of an improvement, they would allow a deduction for the notional cost of replacing the item on a like for like basis. For example, if a landlord replaces a washing machine with a washer dryer costing £350, it is the notional cost for a replacement, like for like, washing machine (say £300) that may be deducted. This approach has been mirrored in the draft legislation [prospective ITTOIA 2005 S311A(9)-(11)].
- The replacement cost may be increased by any costs of disposing the old item but must be reduced by any disposal proceeds received for the old item.
- No distinction is drawn between furnished and unfurnished properties.
- The new relief does not apply to commercial properties including furnished holiday lets. Capital allowances are however already available in place of the renewals basis for expenditure on replacement in commercial/FHL properties. This will not change.
The government issued the results of its consultation on the renewals allowance on 9 December 2015. The response document says that respondents were broadly in support of the new allowance.
No guidance or comment has been issued by HMRC yet as to the standard of records they expect landlords to maintain, especially as at 6 April 2016 when they move into this new regime.
From this point onwards landlords will be eligible to claim replacement expenditure relating to assets owned before 6 April 2016. It would be useful for HMRC to clarify how they expect landlords to demonstrate that this is a replacement rather than initial expenditure and we will keep you updated on this.