Sarah Bradford explains how landlords can obtain tax relief when replacing certain domestic appliances.
Where a landlord lets a property, domestic items may be provided as part of the let. Where the let is unfurnished, this may only include curtains and minimal white goods, whereas in a furnished let the provision of domestic items will be more comprehensive.
Since 6 April 2016 for income tax purposes and 1 April 2016 for corporation tax purposes, the tax legislation (ITTOIA 2005, s 311A; CTA 2009, s 250A) has permitted a deduction for the replacement – but not the initial cost – of certain domestic items. As with all reliefs, its availability is contingent on the associated conditions being met.
Conditions for relief
The relief is only available when Conditions A to D below are met.
Condition A is that the person or company is carrying on a property business that includes the letting of residential property.
Condition B is that:
- a domestic item has been provided for use in the residential property (‘the old item’);
- the landlord incurs expenditure on a domestic item for use in a residential property (‘the new item’);
- the new item is provided solely for use by the tenant/tenants;
- the new items replace the old items; and
- following the replacement, the new item is no longer available for use in the residential property.
Condition C is that a deduction for the expenditure is not prohibited by the ‘wholly and exclusively’ rule but would otherwise be prohibited by the capital expenditure rule.
The ‘wholly and exclusively’ rule limits deductibility to expenditure incurred wholly and exclusively for the purposes of the business; in this case, the property letting business.
The capital expenditure rule depends on whether the accounts of the property business are prepared using the cash basis (which has, since 6 April 2017, been the default basis of preparation for eligible landlords) or under the accruals basis (applying either where the landlord is not eligible for the cash basis; for example, because the landlord is a company or rental receipts exceed £150,000, or because the landlord, although eligible for the cash basis has elected instead to prepare accounts under the accruals basis).
Under the accruals basis, a deduction for capital expenditure is not permitted. By contrast, under the cash basis, while capital expenditure can be deducted, this is subject to a number of significant exceptions, including a prohibition on a deduction for capital assets used in ordinary residential properties.
This condition prevents relief from being given twice for the same item.
Condition D is that capital allowances cannot be claimed in respect of the item.
Replacement of domestic items relief is not available for all lets. More specifically, it cannot be claimed in respect of:
- the commercial letting of furnished holiday accommodation; or
- lets of spare rooms in the landlord’s home in respect of which rent-a-room relief has been claimed.
What counts as a ‘domestic item’?
There is no special tax definition of a ‘domestic item’ for the purposes of the relief, and the normal everyday meaning applies. The range of domestic items that may be included where a property is let fully or partially furnished is wide, but includes:
- movable furniture, such as beds, tables, chairs, sofas, freestanding wardrobes, chest of drawers, etc.;
- furnishings, such as curtains, carpets, rugs, cushions, etc.;
- household appliances, such as fridges, freezers, washing machines, tumble driers, ovens, microwaves, kettles, etc.; and
- kitchenware, such as kitchen utensils, crockery, cutlery, etc.
However, fixtures (such as fitted bathrooms and kitchens and boilers) do not count as domestic items and, consequently, do not qualify for domestic items relief.
Amount of the deduction
Where the conditions for relief have been met, a deduction can be claimed in respect of the cost of the replacement domestic item. The amount of the deduction depends on whether the new item is a like-for-like replacement of the old item.
Where the new item is the same as, or substantially the same as, the old item (a like-for-like replacement), the permitted deduction is simply the cost of the new item. However, where the replacement is not a like-for-like replacement, for example, where the replacement is of a better quality than the original, the deduction is capped at the amount that the landlord would have needed to spend on an equivalent item.
It should, however, be noted that HMRC allow for technological innovation. For example, where the landlord replaces a television that is ten years old with a new one, the fact that the technology has advanced in the interim does not necessarily make the replacement an improvement on the original – it is necessary to have regard to the models available at the time of the purchase of the old and new items in determining whether the replacement is an equivalent replacement or an upgrade. The rule is that expenditure on an equivalent model is deductible, but an enhancement element is not.
Incidental capital expenditure
The amount of the deduction is increased to reflect any incidental capital expenditure incurred either in connection with the disposal of the old item, or the purchase of the new one. This may include, for example, the costs of installing the new item.
Proceeds from selling the old item
Depending on the condition of the old item, the landlord may be able to sell it. Where this is the case, the amount of the deduction is reduced for any money which is received from the sale of the old item.
Rather than disposing of the old item and buying a new item separately, the landlord may be able to trade in the old item in part payment for the new item. In a part-exchange situation, assuming the new item is equivalent to the old item, the amount of the deduction is the amount that the landlord pays in excess of the trade-in value received for the old item.
For example, if a landlord buys a new cooker for £700 and receives a trade-in allowance of £100 for the old cooker, the deduction which he can claim in respect of the replacement cooker is £600.
Claiming the relief
Unincorporated traders can claim replacement of domestic items relief via the self-assessment return, entering the amount in the relevant box on the property income pages.
Example: Claim for replacement of domestic items
Joe has several properties which he lets as furnished lets. In 2017/18, he replaces the following domestic items:
In property 1, he replaces the old washing machine with a washer drier. The washer drier cost £450; a washing machine equivalent to the old machine would have cost £320. Joe also pays £15 for the disposal of the old machine and £35 for the installation of the new machine.
In property 2, Joe buys a new sofa for £700 to replace the existing sofa. The new sofa is a like-for-like replacement of the old sofa. Joe sells the old sofa for £50.
In property 3, Joe buys a new fridge for £250, receiving a trade-in allowance of £25 for the old fridge. He pays delivery costs of £20. The new fridge is an equivalent model to the old fridge. He also buys a microwave for the property costing £99 as there was not one in there previously.
Joe is able to claim the following deductions:
· £370 in respect of the washer-drier in property 1 – the deduction is capped at the cost of a like-for-like replacement (£320), but the deduction is increased to reflect the costs of disposal (£15) and installation (£35);
· £650 for the sofa in property 2 – the cost of the new sofa (£700) is reduced by the sale proceeds of £50 received from the sale of the old sofa;
· £245 in respect of the fridge in property 3 – the cost of the new fridge (£250) is reduced by the trade-in allowance of £25, but the deduction is increased to reflect the delivery costs of £20; and
· no deduction is allowed for the cost of the microwave in property 3, as this is not a replacement item.
Thus, Joe can claim replacement of domestic item relief of £1,265 in 2017/18 when computing the profits of his property business.
Practical Tip :
Keep a record of the costs incurred in replacing domestic items, including any incidental costs, and remember to claim the relief.
This article was first printed in Property Tax Insider in November 2018.