Landlord’s Replacement Domestic Items relief

The Wear and Tear allowance that allowed landlords to reduce the tax they paid on furnished property lets was withdrawn at the end of the 2015-16 tax year. The 10% deduction was available to landlords regardless of whether furnishings in their property were replaced or not.

The Wear and Tear allowance was replaced by a new relief known as the Replacement Domestic Item relief which commenced April 2016. The new relief only allows a claim for tax relief when they actually replace qualifying items, and in most cases is a lot less advantageous for landlords than the old 10% deduction. The allowance is available for the cost of domestic items such as movable furniture, household appliances, kitchenware and furnishings such as curtains and carpets.

The amount of the deduction is based on:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
  • the incidental costs of disposing of the old item or acquiring the replacement; less
  • any amounts received on disposal of the old item.

There is an important distinction to be made when considering if a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s guidance provides the example of replacing a sofa with a sofa bed and is clear that if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference as this is an ‘improvement’.

However if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

Planning note:

When you purchase a buy to let property and the purchase price includes domestic items, make sure the cost is included in the contract. In this way, when you replace one of these items, the replacement cost will qualify for the new relief.

Posted in Income Tax

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