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The first trickle of tax return information for the 2013-14 tax year has started to arrive in our offices. My advice to clients gathering information together is they should bring in all the things they think might be relevant. We can then pick out what is not deductible for tax purposes. This year, for my clients with rental income, I will be looking out for any expenditure on fridges.
Yes, really, fridges - and anything else that might be classed as a white good. A modest but rather helpful extra-statutory concession has been disposed of with effect from 6 April 2013 and this will have consequences for landlords of unfurnished residential properties. The 2013-14 tax returns now in hand are the first where we’ll start to see the effects.
Backing up a little, when it comes to property income it’s a case of divide and conquer. You need to separate UK from EU and rest of the world, commercial from residential, holiday lets from longer term residential and finally furnished from unfurnished. Tax treatment can vary between the categories.
I want to focus on the last two - furnished versus unfurnished residential lets. The definition of ‘furnished’ is very strict and many properties fall into the unfurnished/partly furnished category because they are not fully furnished.
For furnished property there are special rules that allow relief for the cost of replacing items of furnishing such as carpets, curtains, white goods etc. Instead of claiming the actual costs of replacement etc, you can claim ‘wear and tear’ allowance each year - this gives deduction calculated as a percentage of the rental received.
But many unfurnished properties will contain some furnishings e.g. carpet, oven, and possibly some white goods too. However, they are not eligible for wear and tear allowances because they are not fully furnished. Previously relief for the costs of any ad hoc furnishings would be given on a renewals basis. You didn’t get relief upfront for the cost of a fridge, say, but you could at least get relief for the cost when it was replaced.
But from 6 April 2013 there will only be relief available for repairs - and by definition replacing a whole item is not a repair!
So, according to published HMRC advice, replacing an integral fridge is a repair. This is because it is integrated into the house and the whole house has not been replaced. But replacing a free-standing fridge is not a repair and no relief for the cost is possible.
The same rule about replacement applies to furnished and unfurnished properties, but as the wear and tear allowances are available to the former at least some tax relief can still be obtained. In the meantime, landlords of unfurnished properties will lose out.
Both professional bodies in tax and accounting have been lobbying against the change, but as yet without progress. If you are a landlord with unfurnished/partly furnished property, it might be time to consider what furnishings and equipment you want to provide to tenants.
Helen Thornley, Tax Consultant
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