Posted by Simon Misiewicz on 10th August 2013
Do you own furnished properties?
Imagine with me that Susan buys a property and charges £595 as a furnished let. She could have got £495 but the market in her area demands more furnished properties. She therefore decides to put in bedroom and living room furniture and other soft furnishings that costs £5,500.
As a result of the 10% wear and tear allowance she is therefore able to claim 10% of the annual rent of £7,140 being £714 per year against the additional rent of £1,200 (£595 less £495 = £100 X 12) (1).
You may consider this to be a fair cost allocation but in reality it is not. By simple maths we can work out that it would take seven years before the 10% wear and tear allowance will equate to the cost of furniture and white goods. Not only that but Susan has to find £5,000 in cash to meet the demand of the market.
What is the alternative?
HMRC states that the following costs may be offset against taxable income (2):
- interest and other finance charges
- legal, management and other professional fees
- costs of services provided, including wages
Example: John has a property next door to Susan and gets the same amount of rent of £595 per month. He hires the equipment, which would cost £5,000. The supplier agrees to hire out the assets at £3,000 over three year agreement, knowing full well that they will get the assets back to rent out once more.
The cost of the furniture is therefore £1,000 per annum and can be offset against his tax in full. The benefits here is that he is able to offset an additional £286 against his tax but in reality has only had to find £1,000 each year compared to £5,000 that Susan paid for her furniture.
This strategy is very good for those that are not cash rich and already pays tax on their property investment income. It is not the best strategy for those that have spare cash and do not pay tax on their property investments (not many of those about).
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