New statutory renewals basis for property businesses

In the July 2015’s Summer Budget, the Chancellor caught everyone by surprise by announcing two major changes to the taxation of buy to let properties: the abolition of wear and tear allowance and the restriction of tax relief on loan interest.

The changes to loan interest relief do not begin until April 2017, but wear and tear allowance was abolished on 6 April 2016 and replaced with a new statutory renewals basis for all residential landlords.

The old regime

Prior to 6 April 2016, landlords of fully furnished residential property could claim wear and tear allowance (10% of net rents) as a deduction from their rental profits. Wear and tear allowance was often more than the actual expenditure, meaning that taxable profits could be lower than actual profit.

By contrast, landlords of unfurnished residential property could not claim wear and tear allowance and, since the non-statutory renewals basis was abolished in April 2013, they have been unable to claim for the cost of replacing furnishings. The only way they could get relief for these items was to begin renting their properties on a fully furnished basis

The new regime

With effect from 6 April 2016, wear and tear allowance is abolished. Instead, all landlords can claim the following:

  • A new statutory renewals basis, known as “replacement of domestic items relief”
  • Replacement of fixtures

The meaning of these two terms is set out below.

Replacement of domestic items relief

To qualify for the new relief, all of the following conditions must be met:

  1. The person carries on a residential property business
  2. The ‘domestic’ item (see below) is provided for use in the residential accommodation, replacing the old item, and must be provided solely for the use of the lessee (i.e. no private use to the landlord)
  3. The expenditure is capital expenditure incurred wholly and exclusively for the purposes of the property business – without these rules a revenue deduction would not be possible
  4. The expenditure does not qualify for relief under the capital allowances rules

What is a “domestic item”?

The term “domestic items” covers the kind of things that you would need to put into a property to be able to live there:

  • Furniture (beds, chairs, tables etc.)
  • Furnishings (curtains and carpets)
  • Household appliances (free-standing white goods)
  • Kitchenware (glasses, crockery, cutlery etc.)

These are the items which would have been covered by wear and tear allowance. However, landlords will now receive tax relief for the actual amounts spent on these items rather than being able to claim wear and tear allowance which, at 10% of net rents, could have been a higher figure.

Replacement of fixtures

For expenditure on items not included as domestic items, it may be possible to claim tax relief on the basis that the expenditure is a repair. For example, replacement of fitted kitchen items such as built white goods will qualify as repairs meaning that tax relief for the cost of these items will be available (note that free-standing white goods are covered by domestic items relief).

Similarly, replacement of kitchen units or bathroom fittings would also qualify as repairs provided that there has been like for like replacement. Income tax relief is not available for expenditure on improvements.

Restriction of tax relief on loan interest

The other change was to the availability of tax relief on loan interest and this could have a major impact on the tax payable by landlords. To read more please click here.

The way forward

The taxation of property income is undergoing major changes and landlords need to be aware of how they will be affected so that they can take any necessary action(s) to minimise the tax impact. We would be happy to meet with you to discuss your needs.

If you would like any further advice, please contact Chris Hodgson or Dorothy Johnston.

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