REPLACEMENTS BASIS FOR RENTAL BUSINESSES

We have various clients who receive rental income from residential lettings.  We have been asked to remind them of the change to the relief for “wear and tear” allowance and the renewals basis for expenditure within their properties, and particularly how these differ for corporate landlords?

With the exception of furnished holiday lettings, capital allowances are not available for the cost of capital items used within a dwelling let out residentially (s.35 CAA 2001).  Prior to 6 April 2016 (1 April 2016 for companies) such taxpayers could only claim relief based on the “wear and tear” allowance at a rate of 10% of gross rents to give a measure of notional relief for the provision and replacement of such expenditure.

From 6 April 2016 the wear and tear relief is replaced by a standard “Replacement Domestic Items relief” (s.311A ITTOIA 2005 for noncorporate taxpayers, with mirror provisions for companies under s.250A CTA 2009). The key points of the new rules are summarised below:

  • Relief is only available on the replacement of an existing item, and not therefore on the initial purchase or the purchase of existing white goods, furnishings etc with a building
  • If there is a sale or part-exchange of an old item, the consideration or discount received is netted-off against the allowable cost of the new item
  • The legislation contains a rule that restricts expenditure on the new item, if not “substantially the same” as the old item being replaced, which would limit the relief to the cost of an equivalent “old” item. This would apply, for example, on replacement of a refrigerator for a significantly larger model needed to cope with an increased number of tenants within a building.

Relief under these rules is not available for furnished holiday lettings, where capital allowances would generally be available (s.311A(7) ITTOIA 2005,   s.250A(7) CTA 2009).

The new rules apply to expenditure incurred on or after 1 April 2016/6 April 2016 for companies and non-company taxpayers respectively, with the “wear and tear” allowance ceasing to be available on that date accordingly.

For companies with an accounting period that straddles 31 March 2016, the period is split into two separate notional periods with profits being split accordingly between the pre and post 31 March periods. This is done by default on a time apportionment basis although a different apportionment may be claimed on a just and reasonable basis. Relief under the new rules then applies to the pre 31 March profits under the old rules, with “wear and tear” available if applicable, and post 31 March replacements basis available for qualifying expenditure incurred after that date –

Example

“Proper T Ltd” has the following results for its furnished residential property business for the year ended 31 December 2016: £
Rental profits (before “wear and tear” or “replacement items” relief) 75,000
Expenditure incurred on qualifying “replacements”:  pre-1 April 2016 £8,000, post 31 March 2016 £12,000
Profit relating to period 1/08/15 – 31/03/16 (243 days) 49,931
Less – Wear and tear relief (10%)  (4,993)
Net taxable profit to 31/03/16 44,938
   
Post 31 March 2016 profits (122 days) 25,069
Less – relief under new “replacements” basis       (12,000)
Net profit from 01/04/16   13,069
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