Wear and tear allowance and replacement relief Guide for Landlords
Steve Sims explains what wear and tear is and how the law changed for landlords claiming tax relief.
- What is Wear and Tear?
- How Wear and Tear Rules Change in 2016
- Wear and Tear Allowance until 5 April 2016
- The 10% Wear and Tear Allowance
- Wear and Tear Allowance for Unfurnished Properties
- Replacement Relief from 6 April 2016
- Claiming Wear and Tear Allowance or Replacement Relief
- Tenancy Deposit Wear and Tear
- Fair Wear and Tear Allowance for Landlords Explained
This guide explains how wear and tear rules work and how landlords can claim tax relief for replacing items in their rental properties under both the new and old sets of rules.
The old law 10% Wear and Tear Allowance was replaced by Replacement Relief from 6 April 2016.
Landlords should follow the 10% Wear and Tear rules for their January 2017 self-assessment tax return and switch to the new Replacement Relief rules from 6 April 2017 for their January 2018 and subsequent tax returns.
This article also looks at 'fair wear and tear' and 'betterment'. These concepts are different from tax relief but are in fact rules landlords need to follow when spending money from tenant deposits to replace or repair damaged items.
What is Wear and Tear?
Wear and Tear is an allowance landlords claim to offset the cost of replacing moveable assets when they've reached the end of their useful life.
HM Revenue & Customs (HMRC) lists these assets as including:
- Furniture, such as beds, sofas, tables and chairs which are not fitted and can be easily moved.
- Standalone appliances such as TVs, fridges, freezers, washing machines, cookers and dishwashers.
- Carpets and floor coverings, including laminate or wooden flooring.
- Soft furnishings, such as linen, curtains or cushions.
- Crockery or cutlery.
- Chairs, tables, shelves and other furniture.
The list is doesn't include every possible item, but it gives an idea of what to include in a claim.
Landlords can't claim for providing or replacing fixtures or fittings, such as baths, sinks or boilers under wear and tear rules. That doesn't mean the cost of supply or replacement cannot be claimed, but landlords should apply capital allowance rules to these items.
How wear and tear rules changed in 2016
How landlords claim wear and tear against property profits changed from April 2016.
In 2016, landlords had two sets of rules for offsetting the cost of repairs and maintenance against their profits. One set laid out the rules until 5 April and another from 6 April onwards.
Since 6 April 2016, when wear and tear rules were last updated, what landlords could offset depends on if the home they were renting out was furnished or unfurnished.
- Furnished property landlords could claim a 10% wear and tear allowance each year regardless of whether they spent any money on replacing furnishings or appliances.
- Unfurnished property landlords could not make any claim for providing or replacing these items unless they were integrated appliances - such as a built-in fridge, cooker or dishwasher.
- Replacing integrated items is tax-treated as a repair.
- Landlords could claim the cost of repairs and maintenance for both types of rental property.
Many landlords and tax professionals felt this was an uneven playing field and lobbied for fairer wear and tear rules. As a result, the government changed the law from 6 April 2016.
The 10% Wear and Tear Allowance was scrapped and Replacement Relief took its place, but the new law also changes how landlords can offset wear and tear against tax.
Wear and Tear Allowance until 5 April 2016
The old rules meant what landlords claim as wear and tear depended on the category of property rented out.
The first step is understanding the difference between furnished and unfurnished homes.
Unhelpfully, a furnished home isn't defined in law but is generally considered a home 'let with enough furniture, furnishings and equipment for normal residential use'.
For practical purposes, this means a home equipped with all a tenant would need to sleep, sit, cook and eat. Supplying white goods, carpets and curtains wasn't enough. A furnished room or home is more like a hotel room, where a tenant can move in and live comfortably with just their personal belongings.
The 10% Wear and Tear Allowance
Under the old rules, calculating the 10% wear and tear allowance wasn't as simple as most landlords think.
The correct claim was for 10% of net rents from furnished properties after deducting any bills due to the tenant that are paid by the landlord. For instance, these bills could have covered satellite TV, broadband or utilities. This allowance was scrapped from 6 April 2016.
Replacement Relief from 6 April 2016
From 6 April 2016, the 10% Wear and Tear Allowance was scrapped and replaced with Replacement Relief. This relief applies to all rented properties, not just furnished homes.
Landlords can claim:
- the cost of the replacement capped at the cost of a modern equivalent if the new item improves the old one. This covers replacing old technology with cheaper, new technology
Plus
- the costs of disposing of the old item and transporting and installing the replacement
Minus
- any amount received in cash or in kind on disposal of the old item
Points to remember
- Only homeowners running a property business can claim Replacement Relief.
- The purchase must relate to buying an item for the sole use of a tenant.
- Replacement Relief doesn't apply to homes subject to Rent-A-Room Relief, holiday lets or uncommercial lets (a property not let at the market rate).
- The new rules also bar landlords from claiming the cost of replacement tools for a property business.
Wear and tear for unfurnished properties
The old rules stated that landlords couldn't make a claim for providing or replacing moveable assets in unfurnished properties by claiming the 10% Wear and Tear Allowance or any other tax relief.
The new law applies to landlords with unfurnished, part furnished and furnished properties. If a landlord is providing furnishings in the property for the first time, then they can't claim Replacement Relief.
Claiming Wear and Tear Allowance or Replacement Relief
Landlords claim 10% Wear and Tear Allowance by completing the relevant boxes on the property pages of their self-assessment tax returns for 2015-16 tax year. HMRC will update the forms for claiming Replacement Relief in the 2016-17 tax year.
If a claim is barred for Wear and Tear or Replacement Relief, you could look instead at making a capital allowances claim.
Tenancy Deposit Wear and Tear
Claiming for the costs of wear and tear on furnishings, appliances and other items provided for tenants in furnished rental homes is confusing for landlords who have to differentiate between 'fair wear and tear' and the Wear and Tear Allowance for tax.
Read HMRC guidance on Replacement Relief to find out more detailed information.
Fair Wear and Tear for Landlords Explained
The concept of fair wear and tear has nothing to do with tax. It actually relates to a tenant's obligation to return a home to a landlord in the same state when they leave as when they took on the property, taking wear and tear into account.
Fair wear and tear considers several factors about a property or any moveable asset or fixture or fitting.
- The age, quality and state of repair at the start of the tenancy.
- The usual expected lifespan of the item and any depreciation in value.
- Usage
- The number and category of tenants - for example, a single pensioner is unlikely to subject an item to as much wear and tear as a family with pets or young children.
- The length of the tenancy.
If the item is damaged at the end of the tenancy, the cost of replacement or repair is worked out on the basis of applying fair wear and tear.
So, if a landlord redecorates before a let, a few scuffs and scrapes should be expected as fair wear and tear. But if large areas of paintwork are cracked and peeling due to the tenant's misuse of the property, the landlord can claim the cost of repair from their deposit.
What is Betterment?
Betterment is a legal principle that says a landlord cannot expect a tenant to pay the full cost of replacing, repairing or cleaning an item in a property if it was already soiled or well-used at the start of a tenancy.
The aim is a landlord should not expect the tenant to pay for a better item than the one originally supplied.
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