PIM3200 - Furnished residential property: wear and tear allowance

Summary

Income from furnished lettings is part of the taxpayer's rental business. Generally the same rules apply as for other lettings.

But where a taxpayer lets a residential property furnished, plant and machinery capital allowances can’t be claimed on furniture, furnishings or fixtures within the property. Instead a deduction can be claimed for either:

• a wear and tear allowance of 10% of the ‘net rent’ from the furnished letting to cover the depreciation of plant and machinery, such as furniture, fridges etc supplied with the accommodation,

or

• the net cost of replacing a particular item of furniture etc, but not the cost of the original purchase; this is called a ‘renewals allowance’.

This is ESC/B47. More details about what this concession covers and how it is operated are given below.

A taxpayer may let both furnished and unfurnished property. If so, you must ensure that the 10% is calculated only on the net rent from the furnished lettings.

If a landlord receives a premium for the grant of a lease of furnished residential property then the chargeable amount of the premium is included in the ‘net rent’ for the purposes of computing the 10% wear and tear allowance for the relevant tax year (see PIM1200 onwards).

Before 1975-76, when the general 10% basis started, there were several bases in common use. We will not disturb these so long as the let properties to which they apply remain in the same ownership and they continue to be used. But a taxpayer can change to the 10% basis if they wish. Any new properties must use the 10% basis.

Furnished holiday lettings are different

Furnished holiday lettings are different because plant and machinery capital allowances may be claimed as if the activity were a trade. For these lettings a taxpayer can claim plant and machinery allowances on plant and machinery in the accommodation and the wear and tear allowance isn’t available - see PIM4100 onwards.

What the 10% wear and tear allowance covers

The 10% wear and tear allowance is only designed to provide a measure of relief for the depreciation of the plant and machinery within a residential property. It isn’t intended to cover:

• the capital cost of the residential property itself or the cost of improvements to the property; but a taxpayer may be able to claim relief for repairs (see PIM2020),
• plant and machinery in other kinds of furnished accommodation, such as offices (where capital allowances may be claimed).

The wear and tear allowance is calculated by taking 10% of the net rent received for the furnished residential accommodation. To find the ‘net rent’ you deduct charges and services that would normally be borne by a tenant but are, in fact, borne by the taxpayer (for example, council tax, water and sewerage rates etc).

The 10% deduction is given to cover the sort of plant and machinery assets that a tenant or owner-occupier would normally provide in unfurnished accommodation. These are things like:

• movable furniture or furnishings, such as beds or suites,
• televisions,
• fridges and freezers,
• carpets and floor-coverings,
• curtains,
• linen,
• crockery or cutlery,
• plant and machinery chattels of a type which, in unfurnished accommodation, a tenant would normally provide for himself (for example, cookers, washing machines, dishwashers).

This list isn’t meant to be complete but gives an idea of the assets the wear and tear allowances covers.

Title to the 10% deduction does not depend on the provision of each and every item in the list. The relief is calculated simply on the net rents and not on the cost of particular items. But the deduction is only due if furnished accommodation is genuinely provided. A furnished property is one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc. The provision of nominal furnishings will not meet this requirement. If the accommodation isn’t furnished, or only partly furnished, the 10% wear and tear allowance isn’t due.

Possible advantages of 10% wear and tear allowance

The possible advantages of the 10% wear and tear allowance over the alternative, (the renewals allowance) are that:

• it is simple to calculate,
• the taxpayer gets a deduction from the outset; the renewals basis - outlined below - only gives relief when they replace the furnishings etc.

If a taxpayer chooses to take the 10% wear and tear allowance, they can’t later claim for the cost of replacing the assets (but they can claim the cost of repairing them). Nor can they deal with some assets on one basis and some the other. If they take the 10% wear and tear allowance that is the only relief they can have for the depreciation of plant and machinery (furniture, furnishings and fixtures etc) of a type that, in unfurnished accommodation, a tenant would normally provide for himself (see the list above).

Renewals & 10% wear and tear allowance

However, in addition to the 10% allowance, a taxpayer can also deduct the net cost of renewing or repairing fixtures that are an integral part of the buildings. The net cost means the cost of the replacement less any amount received for the old item. See below for renewals of fixtures in unfurnished property.

Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold. For example, baths, washbasins, toilets, central heating installations. Expenditure on renewing such items is normally a revenue repair to the building. It is due even though the 10% wear and tear allowance has been deducted.

But a taxpayer cannot deduct:

• the original cost of installing these fixtures,
• the extra cost of replacing a fixture with an improved version; for example, where a worn out but basic, cheap bathroom suite is replaced with an expensive, high quality suite; they can only deduct the cost of replacing like with like.

The original cost of installation means either:

• the cost of installing the assets for the first time in a new property, or
• the cost of replacing worn out assets in an old property that has been bought to let, or
• which you are converting to let.

For more about capital expenditure (not allowable) and repairs (allowable) see PIM2020.

Renewals: furnished & unfurnished property

The cost of replacing plant and machinery supplied with the property can be claimed as an expense where neither the 10% wear and tear allowance nor plant and machinery capital allowances are claimed. This is called the ‘renewals basis’. It is like the wear and tear allowance for furnished letting in that:

• the renewals basis covers the same kind of assets; that is, free-standing movable plant and machinery assets like furniture, carpets, curtains, cookers, fridges etc, and
• as a separate matter, revenue relief may also be due for replacing fixtures in the same way as in the wear and tear case (see above).

The renewals allowance is also available for unfurnished property. Here we will mainly be concerned with fixtures. But the taxpayer may also provide some plant and machinery assets to the tenant (such as a heating boiler) although the let can’t be regarded as ‘furnished’. The taxpayer can claim a renewals deduction in the same way but they can’t claim the 10% wear and tear allowance because they don’t come within the terms of ESC/B47 (see above).

Whatever basis is chosen must be followed consistently. It isn’t possible to chop and change between the wear and tear allowance and the renewals allowance from year to year.

Example illustrating renewals principles

Malcolm replaces a washing machine in a flat he lets. He sells the old washing machine for £20 and buys a washer dryer costing £559 to replace it. The cost of buying a new washing machine like the old one would have been £399. Malcolm deducts from the £559 both the £20 received for the old machine and the £160 that represents the difference in cost between a washing machine and a washer dryer. His renewals deduction is therefore £379.

Sometimes it is impossible to find the current cost of replacing an old asset with something identical. In the previous example, the old washing machine may be of a kind which is no longer made. Common sense has to be used to find the cost of a reasonable equivalent modern replacement.

Further guidance on the renewals basis can be found at BIM46935.

Concessional allowances

Where a taxpayer claims that the 10% allowance is inadequate, you should say that HMRC is only prepared to give this concession on its own terms. It is always open to the taxpayer at the outset to adopt the renewals basis instead. In other cases the 10% allowance may seem over-generous, but you should not seek to restrict the deduction for that reason.