How will the ‘wear and tear’ tax relief changes impact residential landlords in England and Wales?

The Summer Budget was overshadowed by the tax relief changes affecting landlords. However, one other notable change to residential lettings included the scrapping of the ‘wear and tear’ tax relief.

This will impact on how landlords account for the realities of wear and tear in relation to their accounting practices. The Budget’s reason for the change is thus:

“Currently, landlords of furnished properties can deduct 10% of their rent from their profit to account for wear and tear, irrespective of their expenditure. This means landlords can reduce their tax liability even when they have not improved the property. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur. (HMT, 2015)”

This change will be huge as it will affect all landlords in England and Wales from 2016. The reasons are simple enough. The Guardian has found that “the removal of the 10% wear-and-tear allowance is forecast to make £205m in 2017/18, falling to around £165m in subsequent years” (The Guardian, 2015). This is a large amount of funding for the Government, and it is politically expedient at the moment to allow landlords to ‘take a hit’, as they believe we ‘should all be in it together’.

Politicking aside, the reality for hard-working landlords will be a cost-by-cost based expenditure regime that will be tapered to legitimate purchases only. The Residential Landlord Association believes that there is a silver lining in this policy. RLA argues, “HMRC has announced the scope of the changes in a consultation document. One important point is that whereas the old wear and tear tax break applied only to fully-furnished properties, agents and landlords will in future no longer need to decide whether their property is sufficiently furnished to claim the new replacement furniture relief. This is because the new relief will apply to all landlords of residential dwelling houses, no matter what the level of furnishing” (RLA, 2015).

This is a big change; the previous regime only allowed landlords with furnished or part-furnished properties to apply for the ten per cent rebate. However, this new system will allow all landlords in all differently furnished properties to apply for replacement costs to be deductible. However, the National Landlord Association has undertaken research which has found that these changes will impact on 47 per cent of landlords. The Government’s logic surrounds the fact landlords could claim whilst properties were not maintained. There is evidence to suggest this has occurred. Shelter, in partnership with the University of Cambridge, explored maintenance levels and the correlation between rental rises and the state of properties. Therefore, by forcing landlords to actually ‘maintain’ properties to claim expenses on all types of furnished properties, the Government believes will help increase the overall maintenance levels of UK rental properties.

These changes have created another anomaly, insofar as a landlord would be, if it doesn’t affect the health and safety of a tenant, able to hold off on new purchases for their properties until after 2016. This is because, until this period, the ten percent rate is available. Therefore, there has been unease amongst some charities, including Shelter, that the changes will result in landlords ‘dragging their feet’ in relation to property maintenance issues.

Another issue facing furnished or mixed furnished property landlords is the administrative burden facing landlords with a cost-by-cost based system. The Association of Residential Landlords believes landlords now face, “a significant administrative and record keeping burden [which is now] placed on landlords in order to claim the tax relief” (ARLA, 2015). This burden, ARLA argue, will force landlords to increase rents in low rental yield areas across the South West, Midlands and North of England. Furthermore, these changes will force landlords into a quandary in terms of quality provision for their properties.

ARLA believes these changes will impact on the UK housing stock. They believe, “Landlords will be able to claim for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use; such as beds, wardrobes, tables, sofas, fridges, washing machines, carpets, curtains, cutlery and crockery. However, if the landlord sells the item being replaced, the sale price of that item must be deducted from the purchase price of the replacement, and the tax relief can only be claimed on the remainder. Further, landlords cannot claim for ‘improvements’. If the replacement item is an improvement on what was there before (i.e. a washing machine is replaced with a washer-dryer), then only the cost of a like-for-like replacement can be claimed. Fixtures integral to the building (i.e. baths, toilets and boilers) that are not normally removed by the owner if the property was sold are not included” (ARLA, 2015).

In conclusion, these changes are meant to create a sense of equilibrium between furnished and unfurnished landlords. However, the administrative element along with the like-for-like stipulations will hinder landlords in buying quality provisions for their property portfolios. Like the personal tax relief changes, it is not outside the realm of impossibility, to see that these changes will result in increased rents. In a period of state retrenchment and low-pay, this could cause further pressures on UK private rental tenants while making the prospect of being a residential landlord in the UK less enticing. Landlords must plan ahead and evaluate their current business model and understand how these changes will affect their portfolio.