2.4. RENEWING FIXTURES AND FITTINGS Fixtures and fittings are items that are attached to the property and generally cannot be removed without causing damage to it. As a rule of thumb, they are the things that are not normally removed by the seller when a property is sold. They would include: radiators light fittings kitchen units baths, washbasins and toilets. You can claim the cost of repairing or replacing an old or broken fixture against your rental income as long as it is done on a like-for-like basis (i.e. with the closest modern equivalent) and not for a superior product. This is regardless of whether the property is furnished or unfurnished. 2.4.1. Can I claim the costs of a new kitchen or bathroom? Existing let property If you want to put a new kitchen or bathroom in a property that you ve already let out, whether the costs can be reclaimed depends on whether you are just replacing like-for-like or making improvements too. Like-for-like is allowable, but improvement costs are not (http://www.hmrc.gov.uk/manuals/pimmanual/ PIM2020.htm). Example Fred owns and has let out a property for the past seven years. He has now decided to replace the rather worn-out bathroom suite. The original bathroom consisted of a bath, washbasin and toilet. To refurbish the bathroom and replace the old suite on a like-for-like basis will cost 3,000. As Fred has made no improvements, he can claim the whole 3,000 against his rental income. If Fred decides to add a shower (costing 500) to the bathroom when he refurbishes it, then he won t be able to claim this additional cost against his rental income. However, he will be able to claim the costs against his capital gain when he sells the property. If you are having refurbishment work done, ask for a fully itemised invoice, so you can easily separate out the capital costs. 22
New property not yet let If you ve purchased a property and decide to carry out refurbishment works before you let it for the first time, it s a common misconception that you can t claim any of these costs against your rental income. This isn t always the case. The general rule is that repairs to reinstate a dilapidated property are allowable against your rental income provided certain conditions are met. Just because you bought the property not long before the repairs were made does not in itself make the repair a capital cost. Conditions. The main condition is whether the property was in a fit state to be let out before the repairs were carried out. If it was, then you should be able to argue that the refurbishment costs are an allowable expense against rental income. However, another factor to consider is whether the price you paid for the property was significantly lower as a result of the condition it was in. If it was, then HMRC may try to argue that the repairs are capital and not deductible against your rental income. But the repair costs will be allowable where the purchase price merely reflects the reduced value of the property due to normal wear and tear (e.g. if the previous owner had neglected to carry out routine maintenance for many years). 1 If possible, consider deferring any major refurbishments until after the property is let. That way, you will be able to show HMRC that the property was fit to be let out when purchased and, therefore, claim the costs against your rental income. 2 Even if you can t deduct the refurbishment costs against your rental income, still keep the receipts for any work done so that these costs can be offset against your capital gain when you sell the property. 2.5. RENEWING FURNISHINGS AND EQUIPMENT Do not confuse furnishings and equipment with fixtures and fittings. Furnishings and equipment are effectively moveable items and include: beds sofas table and chairs curtains and carpets white goods such as a washing machine or freezer. 23
Prior to April 2013, there were two ways that you can claim for the cost of renewing these items. You could either claim the actual cost of buying replacement furniture or you could opt to claim a wear and tear allowance if the property was furnished. Unfortunately, the renewals basis was scrapped for the 2013/14 tax year onwards. Note. You cannot deduct the initial cost of furnishing a property against your rental income. 2.5.1. Wear and tear allowance This is only relevant if the property is residential and let fully furnished. A furnished property, according to HMRC, is one which is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings. If you provide only nominal furnishings, the property will not meet the test, and you can t claim the allowance. Make sure you rent the property with just enough furniture to qualify as fully furnished so that you can claim the wear and tear allowance. The cost of second-hand furniture is very low compared to the tax savings you could make. The allowance is calculated by taking 10% of the rents received after deducting any charges for services paid by you that would normally be the tenant s responsibility (e.g. water rates and council tax). Example Martin rents out a fully furnished property for 750 a month ( 9,000 a year) inclusive of water rates and council tax. He pays out 200 a year for water rates and 1,000 for council tax. He can claim a wear and tear allowance for the year of 780 (10% of ( 9,000-1,200)). As a higher rate taxpayer, this gives him a tax saving of 312 ( 780 x 40%). The wear and tear allowance needs to be entered in Box 36 of the second UK Property page. Note 1. The wear and tear allowance does not apply to furnished holiday accommodation. Note 2. From 2011/12 onwards, the wear and tear allowance can be claimed by companies which let furnished residential properties. 24
2.5.2. If I claim wear and tear, will I still be able to claim the cost of repairing fixtures and fittings? Yes you can. The wear and tear rule only applies to furnishings so a claim for the cost of repairs to fixtures and fittings would be allowed. 2.5.3. What can I claim if the property is unfurnished? The wear and tear allowance is only available for furnished properties. If you have an unfurnished property then, since the end of the renewals basis, it is very difficult to get tax relief on the cost of renewing furnishings and equipment. 1 One way to get relief is to convert a partly or unfurnished property to fully furnished so that the 100% wear and tear allowance can be claimed. To be furnished, the property will need to have sufficient furniture, furnishings and equipment for normal residential use. 2 HMRC has confirmed that where white goods (cookers, fridges, etc.) are fitted rather than free-standing, they are an integral part of the entire property so the costs of replacing them like for like will be deductible repairs. Although the renewals concession has been abolished, there is still a statutory renewals allowance for replacement tools. This relief is available for all trades as well as property businesses. HMRC interprets the term tool quite narrowly to cover only low value capital items that need to be replaced fairly regularly due to normal wear and tear, e.g. cutlery, crockery, rugs, etc. So, according to HMRC, carpets, curtains or free-standing white goods would not qualify. Contrary to HMRC s guidance, there s no mention of durability or low value in the statute which just defines a tool as an implement, utensil or article. Interestingly, this is the very definition under which, in 1880, the Caledonian Railway Company was able to claim a deduction for its locomotives, carriages and wagons which were certainly not small and very durable. So while it s unlikely to be cost effective for you to challenge HMRC for the tax relief on the cost of one washing machine, if you are looking to replace furnishings in a number of unfurnished residential properties, then it may be worth arguing the point. 25
2.6. CAPITAL ALLOWANCES As a landlord, you may have had to purchase equipment and machinery wholly and exclusively for managing your properties. You may have bought office equipment, such as a computer, which you just use to keep your rental records. You may also own machinery for maintenance of the properties, such as a carpet washer or a drill. As these items are likely to last for more than one year, the general rule is that, you can t claim the full purchase cost against your rental income in the year you bought them but instead can claim a percentage of the cost and this percentage is known as a capital allowance. However, there is an annual investment allowance which allows you to claim 100% of the purchase cost up to an annual limit. Note. You cannot claim capital allowances on equipment or furniture inside a residential property (apart from furniture and equipment in: (i) communal areas not within any individual dwelling ; or (ii) a furnished holiday let. This isn t a problem for furnished properties because you can claim the wear and tear allowance instead. 2.6.1. How much can I claim? The annual investment allowance is 500,000 from 1 April 2014 for corporation tax and 6 April 2014 for income tax to 31 December 2015. From 1 January 2016, it was supposed to return to 25,000 but in the 2015 Budget, the Chancellor confirmed that it is not expected for the annual investment allowance to reduce to this level. The exact change will be set out in the 2015 Autumn Statement. This means that for any equipment you buy after 6 April 2014, you can claim 100% of the purchase cost up to a total of 500,000 for each tax year. It is unlikely that the equipment you purchase to manage your properties will get anywhere near the current 500,000 limit but, if it does, you will only be able to claim 18% of the costs over the annual investment allowance against your rental profits in the tax year you buy the equipment and then 18% of the unrelieved balance of expenditure in subsequent tax years. 2.6.2. Loophole for homes of multiple occupancy (HMOs) You can t usually claim capital allowances for furniture and equipment in a residential property. However, there is an exception for HMOs, such as those shared by students, which are residential properties but contain communal areas, e.g. hall, stairs and landing. These areas don t count as part of the dwelling house so the equipment and furnishings in them qualify for capital allowances. 26