Wear and Tear tax change for Landlords

The wear and tear allowance will be replaced by a new system from April 2016. The past wear and tear allowance allows landlords to deduct (broadly) 10% of their rental income in calculating taxable profit to allow for wear and tear. This allowance will be replaced by a system allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year.

Capital allowances for furnished holiday lets will not be affected.

Who is likely to be affected

Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.

General description of the measure

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Policy objective

The measure will give relief for the cost of replacing furnishings to a wider range of property businesses as well as a more consistent and fairer way of calculating taxable profits.

Operative date

The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.

Details

Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.

The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.

The amount of the deduction is:

·         the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus

·         the incidental costs of disposing of the old item or acquiring the replacement less

·         any amounts received on disposal of the old item

This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.

The renewals allowance for tools at section 68 ITTOIA 2005 and section 68 CTA 2009 will no longer be available for property businesses.