Press release: Tax body welcomes proposals to replace the ‘wear and tear’ allowance with tax relief on actual costs incurred by landlords

rom April 2016, HMRC’s proposal² is that the wear and tear allowance will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings in the property. The intention is that it will lead to more consistency and fairness in the taxation of residential property businesses.

Paul Hill, Chairman of the ATT’s Technical Steering Group, said:

“We welcome the announcement that all landlords of residential dwelling houses will be able to claim this relief under this proposal because it will simplify the tax system.

“Under the current system (which was introduced in 2013), tax relief is only available on residential lettings which have been let fully furnished and it can, at times, be tricky for landlords to ascertain whether the furniture provided results in a property being considered fully or only partly furnished. This proposed new method of tax relief will see this problem disappear.

“The proposed new relief will mean that landlords will receive tax relief for the full cost of replacing furnishings, but no deduction for notional wear and tear. Currently, a landlord can spend nothing at all on replacing furniture in a tax year and still be entitled to claim a wear and tear deduction of 10 per cent of their rental income. In some parts of the country, where rental rates are at a premium, this can represent a significant allowance for no outlay on the part of the landlord; this is the type of inconsistency and unfairness the new method of tax relief should address.

“The ATT agrees with HMRC’s logic that any disposal proceeds from the old asset should be deducted from the cost of the replacement asset in arriving at the amount that can attract tax relief. However, sometimes an additional cost can be incurred in having the old asset removed from the property and this should be included as part of the replacement cost.

“An area of concern for the ATT is HMRC’s idea to exclude the cost of any improvement element of the replacement asset from the amount that can attract tax relief. This part of the proposals has the potential to lead to complexity and confusion and landlords will be looking to HMRC for detailed guidance on how the improvement rule should be applied. Technological changes in items like white electrical goods mean that a replacement appliance with increased functionality may actually be cheaper than the old appliance or that a like-for-like replacement is simply unavailable. Clear guidance is needed on how the new rules will apply in such situations and that guidance will need to be kept up-to-date. This will be particularly important for those landlords who do not use professional advisers to deal with their tax affairs.”

Notes for editors

1. The ATT’s response to HMRC’s consultation on Replacing wear and tear allowance with tax relief for replacing furnishing in let residential dwelling houses can viewed here.
2. HMRC’s consultation document can be viewed here.