Restricting relief on residential lettings

Capital allowances are generally not available for common items of plant and equipment such as white goods used in a residential lettings business.

Instead for many years, owners of partly furnished residential lettings used the non statutory renewals basis which was a concessionary treatment allowed by HMRC. On the original acquisition of an asset, such as a fridge, no tax deduction could be made against the letting income. However, when the fridge was replaced a full deduction could then be made.

Owners of fully furnished residential lettings were allowed to either use a 10% 'wear and tear' allowance which is based on rents received less some standard expenses or the non statutory renewals basis.

The non-statutory renewals basis ceased to have effect for expenditure on replacements of plant and machinery when incurred on or after 6 April 2013 (1 April 2013 if a company). This means that no tax relief is available for such replacements.

Following correspondence with HMRC, they have stated that the owners of partly furnished residential lettings cannot use a different relief known as the statutory renewals allowance as an alternative except in limited situations. This allowance would typically be used to obtain a tax deduction for the replacement of small low cost implements or utensils, for example glasses in a public house or cutlery in a café.

However, they have confirmed that they will accept in respect of a residential lettings business, low value items such as crockery, rugs and low cost soft furnishings which are replaced on a regular basis to qualify under this basis. However, this would not extend to items such as carpets as they are of a potentially higher value and are not expected to be replaced on a regular basis.

Specifically, HMRC have advised that anything freestanding, such as a fridge freezer are not covered as they are capital items and entireties in their own right. However, where they are an integral part of a fixture, such as an integrated oven in a fitted kitchen, these are part of the entirety (the house) and therefore would be deductible as a repair when replaced.

As you can see this is an area where the incorrect tax treatment can cause potential difficulties with HMRC. Please contact us for further advice.