Surely knowing what is tax deductible from my rental income is easy?

Surely knowing what is tax deductible from my rental income is easy?

No is the surprising answer. What qualifies for a tax deduction for a rental business is based on the principles and rules which apply for a trading business but there are differences. Most of these arise from the fact that capital allowances are not available for expenditure on 'plant and machinery' bought for use in residential property. The common types of expenditure under this heading would be beds, furniture, fridges, cookers and fitted kitchens.

There are exceptions to this rule for property which falls within the definition of a 'furnished holiday letting' and expenditure on assets which are used in the non-residential part of a block of flats, for example the hallways.

Also some expenditure may qualify for a tax deduction as it can be regarded as a 'repair' to the house or flat. It is therefore revenue not capital expenditure. Consider this example. The fridge has broken down. It is not economic to fix it, so a new fridge is purchased and put in the same place as the old fridge. Are we going to have a tax write off for the expenditure?

Part or whole

The first issue we have to consider is whether the fridge is a 'fixture'. If something is a fixture then it has become part of the building. It is a fundamental principle of tax that the replacement of a part of an 'entirety' is repair expenditure and is tax deductible. So an integrated fridge in a fitted kitchen is a fixture as part of the kitchen and the kitchen is a part of the house. Replacement of the fridge is therefore tax deductible.

If a fridge is merely plugged into a wall socket in a kitchen and the attachment is no more than is necessary for the object to be used and enjoyed, then it is not a fixture and remains a separate asset (i.e. an entirety). Replacement of the fridge is capital expenditure.

Whether this capital expenditure gets relief depends on the type of rented property. For some types of letting the rules have changed from 6 April 2013:

Type of letting

Pre 6 April 2013

From 6 April 2013

Furnished holiday

Capital allowances

Capital allowances

Unfurnished property

Cost of replacing the item (known as the 'renewals basis')

Renewals basis no longer available so no relief

Furnished

Renewals basis or 10% of net rents ('wear and tear' allowance)

Only wear and tear allowance

Partly furnished

As for unfurnished property

As for unfurnished property

The key change is that you can no longer use the renewals basis for the current tax year onwards. The change has come about because HMRC is required to bring concessions into law and the 10% wear and tear and the renewals basis were concessions. Wear and tear has been put on a statutory basis but not the renewals basis.

Please contact us if this affects you to see whether we can reduce the problem that this may cause.

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