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Tax Video Update - The Renewals Basis

24 June 2013 •

 

WARRENER STEWART TAX UPDATE

REVISED GUIDANCE ON RENEWALS BASIS

What is the change?

Revised guidance was recently issued by HMRC on tax relief available on the cost of renewal of assets for businesses.  This update focuses on the impact for landlords of residential property.

What is the Renewals Basis?

Up to April 2013, there was an option available for landlords who let fully furnished residential property to claim either the wear and tear allowance which is based on 10% of rents received, or the renewals basis, which is based on actual costs incurred on replacing items in property.  Once selected, the option of either wear and tear or renewals could not be changed and in our experience, it was often more beneficial to claim the wear and tear allowance.

Where a property is not let fully furnished, the wear and tear allowance is not available and so the renewals basis was the only option available to the landlord to obtain tax relief on these types of costs.

From April 2013, however, whilst the wear and tear allowance continues to be available on fully furnished lettings, the new guidance from HMRC states that the renewals basis will no longer apply to expenditure on replacing items such as cookers, white goods and so on.

Furnished or unfurnished?

For a residential property to qualify as furnished lettings (and therefore able to claim the wear and tear allowance), the tenant needs to be able to occupy the property without the need to bring any significant items of furniture with them.  Significant items of furniture includes, beds, chairs, tables, sofas and kitchen appliances.  Provided that this is the case then a claim for the 10% allowance would be appropriate.

To support a furnished letting position, it may also be worthwhile to include an inventory of the furniture as part of the letting agreement, if this is not already done.  If the property is not let furnished then no claim for wear and tear is available.

Conclusion

The above change will see a reduction in tax relief available to landlords of unfurnished and partly furnished properties particularly where there is a requirement to replace these types of items moving forward.

“Warrener Stewart understands our business; they give us more than any other Accountancy service we have ever received in the past. They are extremely commercially aware and very current when it comes to changes in tax policy. ”
Diana Hoare - Anderson Hoare