Wear and Tear Allowance and Replacement Relief: tax reform guide
Prior to 2016, landlords could use Wear and Tear Allowance to claim back expenses for replacing furniture in their property. However, along with a raft of changes to taxation rules in the the private rented sector – such as the stamp duty surcharge and phasing out of tax relief on mortgage interest payments – the Wear and Tear Allowance was scrapped. In its place came Replacement Relief and, in this guide, we’re looking at how this works and why it was brought in to replace Wear and Tear Allowance in more detail.
How did the Wear and Tear Allowance work and why was it scrapped?
Under the old Wear and Tear Allowance provision, landlords could offset the costs of replacing moveable assets once they reached the end of their natural use. Assets included items like beds, sofas, tables and chairs.
Previously, landlords could claim a 10% allowance each year regardless of whether or not they spent any money on replacing furniture in their properties. That meant you could technically claim 10% of your net rent without having to replace any item of furniture throughout the year.
Why was it replaced?
The wear and tear scheme only applied to landlords with fully-furnished properties – not ones with unfurnished, part-furnished or holiday lets. For that reason, many felt it was unfair as it arbitrarily excluded some landlords. As a result, there was plenty of clamour for a change in how the Wear and Tear allowance was calculated.
When the change was announced, however, there was also a fair amount of scepticism and frustration. Many landlords felt that calculating 10% of wear and tear was straightforward, and liked that they could benefit from it even if they didn’t have to replace any items in the buy-to-let property.
What is Replacement Relief, and how did the rules change?
As the 10% Wear and Tear Allowance was ushered out through the back door, in came Replacement Relief. It came into effect on April 6th 2016 and has been in force ever since.
The rules changed, and there was a reform after a government review. Supporters argued that it allowed landlords to claim actual costs, which was a fairer way to decide what can and can't be claimed back on a tax return.
To illustrate, if you were a landlord who spent over 10% of your net rental gain under the Wear and Tear Allowance, you’d actually lose out as the limit was capped at 10%. Yet, a landlord who didn’t spend a penny replacing furniture could still make a claim. Landlords with unfurnished properties could only claim against fixtures and fittings, such as washing machines and fridges.
Under Replacement Relief, landlords can only claim the cost of actual replacements, and they need to be like-for-like. So if you have to replace a £500 sofa in your rental property, the new one can cost the same amount. If the price goes over the value, you will lose out on any amount paid over £500.
What and when can landlords claim under the new rules?
Under the new laws, landlords can claim for costs of replacement items. Yet, the replacement cost is capped at the price of the modern equivalent. It covers:
- Replacement beds
- Replacement sofas
- Replacement carpets
- Replacement crockery or cutlery
- Replacement curtains
- Replacement fridges
- Replacement washing machines
- Replacement dishwasher
- Replacement boilers
- Replacement tech, including TVs
You can also claim the cost for disposing of any old items and replacing the new ones, minus any amount received in cash for disposal of the old item.
What (and when) can’t landlords claim replacement relief?
If you’ve just bought a property to let it out, you won’t be able to claim the cost of furnishing it. Therefore, if it’s empty and you need the basics, such as a bed, sofa, tables and chairs, none of those items can be deducted. You can only deduct the costs when a tenant has used them and they need replacing.
The purchase must relate to an item intended for the sole use of any tenants, and Rental Relief doesn't apply to homes subject to Rent-a-Room Relief, holiday lets or uncommercial lets, which is a property not let at the market rate. Under the rules of replacement relief, landlords running a property business cannot claim the cost of replacement tools.
How do landlords differentiate between ‘fair wear and tear’ for the tenancy deposit and the Wear and Tear Allowance for tax?
The Wear and Tear Allowance and 'fair wear and tear' are separate entities. The concept of fair wear and tear has no relation to the tax, and now that the wear and tear allowance has been scrapped, it's easier for landlords to differentiate.
Fair wear and tear is a concept that relates to a tenant's obligation to return the home to the landlord in the same condition they took it when moving in. The idea of fair wear and tear allows for the fact that the condition of the property will naturally degrade over time as a result of normal everyday use. This includes things like minor marks and scuffs on the walls and used furniture.
It considers factors like the age, quality and the state of repair of the items in the property. If something is deemed worn out as an inevitable consequence of regular reasonable use, it's classed as fair wear and tear. However, if an item is broken or treated poorly by the tenant, landlords can claim to deduct some or all of the security deposit.
Landlords also need to take the number of tenants and the length of tenancy into account. A single tenant living somewhere for one year won’t result in as much wear and tear as a family spending four years in a property.
Summary: Replacement Relief and claiming expenses
Whether you're a fan of Replacement Relief or not, it does level the playing field and means you can claim for like-for-like items that need replacing during or after a tenancy. There was no cap enforced with the 10% Wear and Tear Allowance, though you couldn't claim even if you haven't replaced any items of furniture. For now, it's the only way landlords can claim replacements. Before making any claims, it's always best to speak with a financial advisor who can guide you on all things related to tax and expenses.
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