Now that we have entered the new tax year, it may be worth educating certain clients who let residential property that the tax relief that they have enjoyed in the past may be reduced, perhaps significantly, when looking at tax returns for 2013/14.
This is a series of blogs by Mark Morton under the title "Talking to your Clients".
Many businesses receive capital allowances to recognise the depreciation of machinery, vehicles, etc. whilst capital allowances may be due on vehicles used for the purposes of a property business, there are no capital allowances due for machinery used in a dwelling. This means that there are no allowances available for equipment used in residential properties.
However, or many years, pre-dating the idea of capital allowances, HMRC had been prepared to allow some tax relief for expenditure on equipment in property which was let. For many years this was by way of a concession which, if you really want to know, became ESC B47.
One form of relief was something call 'wear and tear'. In simple terms, where a taxpayer lets a furnished residential property, a deduction could be claimed for either:
• a wear and tear allowance of 10% of the 'net rent' from the furnished letting, designed to cover the depreciation of plant and machinery; or
• the net cost of replacing a particular item of furniture, but not the cost of the original purchase, known as renewals basis, subject to a number of detailed rules.
When capital allowances where brought in, no allowances were due for the plant and machinery in a dwelling, so many letting businesses were limited to one of the above two reliefs.
In April 2011, wear and tear was put into 'proper law' and is reasonably generous but only applies to a dwelling contains sufficient furniture, furnishings and equipment for normal residential use, so if a dwelling is only let partly furnished, neither.
In April 2013 the non-statutory renewals basis was withdrawn with no replacement.
This means that where a dwelling is let partly furnished, there are no capital allowances, no wear and tear and no renewals basis; that is, potentially no relief for and fixtures and fittings other than repair costs, which makes the definition of a repair extremely important!