Until the end of the 2015/16 tax year, landlords letting furnished properties were able to claim an automatic deduction of 10pc of net rents to cover the cost of replacing fixtures and fittings. The relief was only available in respect of furnished lettings and it was available regardless of whether any money was actually spent on replacing items.
This relief came to an end on 5 April 2016 and from the start of the 2016/17 tax year, there is a new kid on the block. The new relief - replacement of domestic items relief - is wider than its predecessor in that its application is not restricted to furnished lettings.
The relief is available in calculating the profits of a property business which includes a 'dwelling house'. This does not have to be a house - flats, apartments etc. also qualify. It does not matter whether the dwelling house is let furnished or unfurnished. However, the new relief does not apply to furnished holiday lettings in respect of which capital allowances are available.
In calculating the profits of the property rental business, a deduction is given for the capital expenditure on replacement furniture, furnishings, appliances and kitchenware.
The availability of the relief is conditional on certain conditions being met:
- the expenditure must relate to the replacement of a domestic item for use solely by the lessee in the let property;
- the old item must no longer be available;
- the expenditure is capital in nature and incurred wholly and exclusively for the purposes of the property business;
- capital allowances are not available in respect of the expenditure; and
- rent-a-room relief has not been claimed.
The amount of the deduction is the cost of the replacement item (on a like for like basis) plus any incidental costs of disposing of the old item, less any amounts received in respect of the sale of the old item. The replacement item must be substantially the same as the old item. Where the replacement is superior to the old item, the deduction is limited to the cost of an equivalent replacement.
Harry has an investment property, which he lets out furnished. In 2016/17, he replaces the sofa at a cost of £500 and the fridge at a cost of £300. It costs him £15 to dispose of the old fridge and he sells the old sofa on e-bay for £100.
In working out the profits of his property rental business for 2016/17, he is able to claim a deduction of £715 (the cost of the replacement items (£500 + £300), plus the cost of disposing of the fridge (£15), less the proceeds from the sale of the old sofa (£100)).