During his summer Budget 2015, the Chancellor George Osborne announced a range of new reforms that will have knock on effects for landlords and letting agents. One of the biggest reforms announced was the scrapping of the wear and tear allowance to make way for a new tax relief scheme. A 12 week consultation has recently begun by HMRC in order to discuss the new scheme that will replace the wear and tear policy currently in place.
The wear and tear allowance is a financial relief that pays a landlord 10% of their annual earnings from property rentals in order to replace utilities that have succumbed to wear and tear. For example, if Mr L rented out a property at £750 a month, his annual profit would be £9000, meaning that for that year, Mr L’s wear and tear allowance would equate to £900. Currently, however, this scheme is only available for fully furnished properties.
The new plan – which is due to start rolling out next April – will be available to all landlords, except for those letting furnished holiday properties. Landlords of unfurnished, part furnished and fully furnished properties will all be eligible for this new scheme.
Under the reformed system, landlords will be able to claim tax relief on all ‘movable’ furniture. Movable furniture in this case refers to everything that would be expected to fit into a moving van: carpets, washing machines, TVs, etc. This tax relief will not include integral features, such as boilers, baths, sinks, kitchen units, and any other white goods that a tenant isn’t expected to purchase.
Included in the new tax relief scheme is a concept of betterment, which is a stipulation on how tax relief is provided if utilities are upgraded. For example, if a landlord replaces a washing machine with a washer-dryer, that would be considered by HMRC to be a betterment, but would accrue no tax benefits. If the replacement/improvement cost £600, but a like-for-like washing machine was £400, then the tax relief will not cover the difference. If the landlord then sold the old machine, the amount that the machine was bought for would also be deducted from the total amount of tax relief.
One of the biggest problems with the new tax relief scheme that it could have a negative impact on tenants. It is likely that landlords will become discouraged from making improvements to utilities within a home that they are letting if it would leave them out of pocket. Furthermore, the scheme could also hurt landlords; landlords will be required to keep a record of their actual expenditure from now on to ensure they are receiving the correct amount of tax relief, making the scheme an administrative burden. Despite these concerns, HMRC expects the new tax relief scheme to bring around £205m to the Exchequer in its first full year.
At CPS Homes, we are a professional letting and estate agent that can help answer any questions you may have. If you want more information on how the scrapping of the wear and tear scheme could affect you, or if you’d like us to market your property, please don’t hesitate to contact us or pop into our Woodville Road branch. What's more, if you're a landlord in Wales, don't forget that the Rent Smart Wales legislation is coming into force this autumn, meaning you'll need to register for a licence, whether you use a letting agent or not.