Rental Properties – Furnished Or Unfurnished?

A recent change means that landlords can no longer claim tax relief for the replacement of freestanding white goods in unfurnished residential lettings.  HM Revenue and Customs (HMRC) have confirmed that this change will apply to expenditure incurred on or after 6 April 2013.

It is a change which is likely to provide tension between landlords and their tenants over costs and maintenance.  There is no longer any tax incentive for private landlords to maintain their properties by offering tax relief for the cost of replacing white goods and other furnishings, and they might therefore be tempted to let their tenants manage with worn-out furnishings and broken fridges.  The effective cost to the landlord of replacing such items has increased significantly (by 25% for a basic rate taxpayer and by 66% for a higher rate taxpayer).

The Renewals Basis

It was previously the case, under a concession granted by HMRC, that costs incurred by landlords on the replacement of stand-alone cookers, fridges and washing machines etc. could qualify for tax relief in full via the renewals basis.

As part of the withdrawal of this concessional relief, HMRC have put onto a statutory footing a “renewals allowance” but this only applies to items of a capital nature that are of a relatively low value and have a short useful economic life that would be need to be regularly replaced due to normal wear and tear.  They include as examples crockery, rugs and low cost soft furnishings that might be expected to be replaced fairly regularly.  This statutory allowance does not therefore include the cost of replacing stand-alone white goods. 

Where white goods are fitted within a kitchen i.e. integrated hobs and ovens, HMRC accept that these effectively form part of the property so any replacement of such items would be deductible as a repair in the rental accounts.

Wear and Tear Allowance

The above renewals basis has historically mainly been used by landlords of properties that are provided to tenants either unfurnished or partly furnished.

There has, and continues to be, a separate form of tax relief available for fully furnished properties whereby instead of claiming relief for the cost of replacing and repairing furniture and equipment, the landlord can deduct from the rental income a wear and tear allowance in arriving at the taxable profit generated by the property letting. The wear and tear allowance is calculated by taking 10% of the gross rents received less any expenses paid by the landlord normally borne by the tenants e.g. council tax and utilities.  It should however be noted that, in order to qualify for the 10% wear and tear allowance, properties must be let fully furnished with sufficient furniture, furnishings and equipment as would be expected for normal residential use. In practice this means that a property would need to include beds, chairs, tables, sofas, white goods and all other furnishings which would normally be contained in a typical home.

Because the rules apply from 6 April 2013, many taxpayers who are in the process of completing their tax returns for the year ended 5 April 2014 should carefully consider the impact of these changes on the figures included in their tax returns.

If you are a landlord with partly furnished properties then you may want to consider increasing the amount of furniture provided so that the property qualifies as a fully furnished property, in which case the wear and tear allowance can be claimed. You may want to discuss the commerciality of this with your letting agent and also check up on the legal obligations which are applied in respect of fire safety issues etc. Otherwise, you may want to consider not spending significant sums on the replacement of white goods etc. since tax relief will no longer be available on such expenditure.  If a new kitchen is being planned then you may wish to consider incorporating integrated white goods as future replacements should qualify for tax relief.

The rules for furnished properties which qualify as furnished holiday lettings are different and tax relief is available on the provision of white goods etc. in such properties but detailed criteria have to be met in order for a property to qualify as a furnished holiday let.  Please contact us if you would like further information in this respect.

The above is for general guidance only and no action should be taken without obtaining specific advice