From 6th April 2016 the government abolished the flat rate 10% “wear and tear allowance” for fully furnished properties. Landlords had long benefited from this allowance which allowed them to pay less tax on fully furnished properties. The 10% allowance was calculated on the net rent received by a landlord so long as the property was fully furnished, regardless of whether any furnishings had been replaced due to wear and tear.
Going forward, instead of claiming a flat rate 10% allowance, landlords of fully furnished properties will only be able to claim tax relief for the actual cost of replacing furnishings. HMRC guidance states that this “replacement relief” will be available for the cost of a like-for-like, or nearest modern equivalent replacement furnishing, plus any costs incurred in disposing of, or less any proceeds received for the furnishing being replaced.
Two likely consequences of the change in tax treatment are as follows;
- If a landlord purchases an empty property and fits it out with new furnishings they will not benefit from tax relief on those purchased furnishings. However, if a landlord buys a property with old worn-out furnishings and replaces them, more or less immediately, with modern equivalents they will benefit from replacement relief.
- Those landlords wanting to claim replacement relief will now need to ensure they create and keep up to date inventories and schedules of condition so as to stand up to HMRC scrutiny.
It is important to note that the above does not apply to “holiday lets” given their own special tax treatment.
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