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More bad news for BTLs: Wear and Tear changes

The government really does not like buy-to-let landlords. We’ve already reported on the rules which start to come in from April 2017 restricting tax relief on loans to buy BTLs; and the 3% SDLT surcharge on second homes and BTLs comes in from 1 April 2016.

Of course, if you haven’t borrowed money to buy your BTL and you don’t buy another one, the first two changes won’t affect you. But the third change, which we discuss below, will affect all landlords letting furnished residential property.

For most businesses (including letting of commercial property), tax relief is given for capital expenditure on “plant and machinery” (essentially, the kit you need to carry on the business) through the capital allowances code. For obscure historical reasons, capital allowances have never been available on items provided for use in a dwelling-house. For many years, a “wear and tear” allowance has been given instead, equal to 10% of (broadly) the gross rent. For decades the relief was concessional: HMRC finally got round to making it statutory only in 2011.

“Wear and tear” allowance is not related to the actual cost of providing or replacing furniture or other capital items in the let property. It’s a swings and roundabouts sort of relief: in some years it may exceed the economic cost of providing or replacing items: in other years it may fall short.

But over the years taken together it’s probably been in most cases a reasonable substitute for giving relief for the total costs. But the Government decided last year that it was too generous, and that it should be replaced by a system of giving relief only for the cost of replacing capital items on a like-for-like basis as and when items are replaced.

After a brief period of consultation (in which the Government largely ignored all the constructive suggestions made by contributors) it’s clear that:

  • The new rules will come in from April 2016
  • There will be no “transitional” provisions
  • The new rules will not give any relief for the initial cost of furniture or other capital items

Two points immediately spring to mind. The first is that any landlord contemplating a refurbishment programme involving substantial expenditure on replacing furniture, furnishings, household appliances and so on might wish to defer incurring the cost until after April 2016. Doing so will not affect the “wear and tear” allowance for the current (2015-16) year, which is not affected by actual expenditure: but it will mean that the replacement cost will rank for tax relief after April 2016.

The second is the anomaly that a landlord buying an empty property and equipping it from scratch gets no tax relief under the new rules: a landlord buying an existing BTL with old worn-out furniture and replacing it more or less immediately with modern equivalents will qualify for “replacement” relief.

For more on this and other BTL changes, please get in touch with your usual BKL contact or use our enquiry form.

David Whiscombe

Consultant

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