Wear and Tear changes - April 2016

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. If you haven’t borrowed money to buy a BTL and you don’t buy another one, the first two changes won’t affect you. But the third change will affect all landlords letting furnished residential property.

For most businesses tax relief is given for capital expenditure on “plant and machinery” through the capital allowances code. 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 the gross rent.

“Wear and tear” allowance is not related to the actual cost of providing or replacing furniture or other capital items in the let property. 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. 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.

The new rules will come in from April 2016 and will not give any relief for the initial cost of furniture or other capital items. Therefore a 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.

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