Prior to it being abolished on April 6, 2016 the Wear and Tear Allowance was a means for landlords to ‘write off’ a certain amount of their net income for tax purposes. That’s because under HMRC rules they were allowed to claim 10 per cent based on the fact they would have to replace furniture at some point. As such, it only applied to landlords with furnished accommodation which, under HMRC’s definition, was "one which is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc".
The landlord claimed the discount when filling out his or her annual self-assessment tax form. Items the allowance covered included beds, sofas and other moveable furniture. It also applied to white goods such as fridges and cookers, as well as textiles i.e. curtains, cushions etc.
Wear and Tear and its replacement
The flat rate Wear and Tear Allowance was abolished and replaced by the Replacement of Domestic Items Relief. This allows the landlord to claim back the cost of replacing the same items referred to in the Wear and Tear Allowance, but not their initial cost. The replacement furniture has to be ‘like for like’ i.e. a modern equivalent of the original furniture. As an added bonus, landlords can also claim for the costs of disposing old furniture. However, they must also declare any profits made on disposing of the old i.e. by selling through eBay, at auction etc.
Why it benefited Landlords
Landlords liked the fact that the Wear and Tear Allowance was very easy to calculate – simply deduct 10 per cent of net income. Unlike the alternative Replacement Relief landlords didn’t have to look online to find the equivalent cost of a replaceable item. The Wear and Tear Allowance was also a guaranteed reduction, regardless of whether the landlord bought and replaced any furniture that year or not.
Another benefit of the Wear and Tear Allowance was that if the landlord’s net profit went up (because it was linked to net rental income), so did the amount he or she would be able to claim back from HMRC.
How it could slightly hinder some landlords
If a landlord is forced to spend a lot of money on replacing furniture within a 12-month period, then there is a good chance they would have been out of pocket using the Wear and Tear Allowance. That’s because they would have benefitted more using Renewals Relief (which was the alternative to Wear and Tear Allowance at the time and similar to the new Replacement Relief used to replace Wear and Tear Allowance).
First time landlords in particular may have been confused over the two choices and opted for one over the other, such as the Renewals Relief, because it seemed best at the time. However, they wouldn’t have been allowed to switch to Wear and Tear Allowance at a later date since they had already ‘made their choice’ between the two. This means they could have lost out heavily by not claiming that extra 10 per cent on net income as the years went on.
Speak to Everton Brown who specialises in investment property.
Call 0333 123 1330