By Simon Misiewicz
Did you hear that the wear and tear allowance has been removed? Is this the end for tax relief on furnished properties? Not if you are clever about how you structure property purchases in future.
The problem — the removal of the 10% wear and tear allowance
As you may have seen in the 2015 budget announcement, the 10% wear and tear allowance on furnished properties has now been removed. Previously your monthly rental accounts may have looked something like this:
+£2,000 rental income
-£500 mortgage interest
-£300 utility bills
-£300 other costs
-£170 wear and tear allowance (10% of the rent less utilities)
Leaving £730 profit
Now that the 10% wear and tear allowance has been removed, your monthly profit has increased to £900, which leads to a yearly increase of £816 in tax for a higher rate taxpayer (£170 X 12 months X 40%). Ouch!
Ways to mitigate this increase in your tax
The budget change has removed the automatic entitlement to relief for an assumed amount of 10%, and replaced it with relief only for actual expenditure. It now allows costs to be deducted when you are replacing or repairing furnished items, but crucially, not the original cost of an item.
In the majority of cases, you will be buying properties which already have carpet and, perhaps, curtains. But what if you agreed a deal with the vendor that involved them leaving behind the furniture and white goods? I would think that some vendors may be keen to leave a lot of their furniture behind if it helps them to sell the property to you, particularly if they’re selling a rental property and have no need of the items themselves.
You can ask the seller to list all the items that will be left in the property and you must allocate a cost against each item to ensure that you maximise your tax relief. For example:
- £125,000 house purchase
- £2,500 carpets throughout
- £1,200 curtains throughout
- £2,800 sofa and settees in lounge area
- £3,500 furniture (dining table and chairs, cupboards and wardrobes in bedrooms)
Total purchase price including furnishings = £135,000
If you itemise the deal this way, then subsequently wish to replace any of the items because they look tired or you think the property needs a refresher, then the cost of the replacement items becomes allowable as a deduction that can be offset against your income. If you had bought the property without the furniture and fittings, then purchasing new ones would not be tax deductible.
There is also an added bonus…
Cut your stamp duty
Imagine that you have agreed a price on the property above for £135,000. There would usually be two levels of SDLT to take into account:
- £200 (2% of the difference between £135,000 and £125,000)
- £4,050 (3% on the entire amount of £135,000)
- £4,250 SDLT total
However, as we have seen from the previous example, the total price you pay to the vendor may be partly for the house and partly for the furnishings. If that’s the case, you can reduce the portion of the sale that is subject to SDLT. Let’s assume that you agree that the seller will leave all of the curtains, carpets and furniture items. You agree that these items should be valued at £10,000. The land and buildings cost has therefore been reduced to £125,000. SDLT will therefore be re-claculated as:
- £3,750 (3% on the entire amount of £125,000)
- £3,750 SDLT
The following items are confirmed as being assets that will normally be regarded as chattels and not subject to SDLT:
- carpets (fitted or otherwise)
- curtains and blinds
- free-standing furniture
- kitchen white goods
- electric and gas fires (provided that they can be removed by disconnection from the power supply without causing damage to the property)
- light shades and fittings (unless recessed).
On the other hand, the following items will not normally be regarded as chattels:
- fitted kitchen units, cupboards and sinks
- AGAs and wall mounted ovens
- fitted bathroom sanitary ware
- central heating systems
- intruder alarm systems.
Hopefully, by now you can see there is an added benefit to negotiating the purchase of the fittings — you can reduce not only future tax, but also the SDLT payable on the sale.
Practical steps you should now take to reduce your tax liability
- Agree a purchase price with the seller
- Itemise the furnishings and fixtures on box 10 in form SDLT1
- Keep a record of items that now sit in the property
- Purchase replacement furniture items and offset the cost against your property income
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.