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10% Wear and Tear or Renewals

  1. ‘What is the 10% wear and tear allowance?’
    It is an allowance that HM Revenue & Customs has introduced to make the lives of property investors easier when they are completing their annual tax returns. In a nutshell, it allows you to offset 10% of your annual rental income against your property income tax bill. This sounds straightforward, and in principle, it is.

However, there are some important points to note.

a)     If your rental income includes charges that would normally be borne by a tenant, then these have to be deducted before you calculate your allowance.

You will understand this better in a case study that follows later.

b)     It does not matter how much YOU spend on furnishing your property.

You can only offset 10% of your RENTAL INCOME.

c)      If you use this allowance, then it MUST be used for the duration of the property ownership (unless it becomes a partly furnished or unfurnished property).

  1. ‘When can the 10% wear and tear allowance be used?’
    This allowance can ONLY be used for a FULLY FURNISHED property. It cannot be used for an unfurnished or even a partly furnished property. A fully furnished property is one that a tenant can start living out of as soon as they move in.

In such a property, there will be no need for the tenant to go and buy any items such as furniture and electrical appliances.

The only accessories that the tenant needs to provide are his/her own personal belongings!

  1. 10% wear and tear case studies
    Here are a couple of case studies to illustrate the use of this rule

John rents out a fully furnished property. He receives a monthly rent of £500.

The tenant is responsible for all property bills (e.g., utility bills) and services provided to the property (e.g., gardening).

The annual income for the property is therefore £6,000.

This means that John can offset £600 against his rental profits,

This scenario begins similarly to above, but this time, John is charging £600. He charges an extra £100 because he pays the utility and gardening bills himself.

The annual income is now therefore £7,200.

John CANNOT offset 10% of £7,200 against his rental profits.

He firstly has to deduct the costs that would normally be borne by the tenant. In this case, it is £100 per month.

Therefore he can only claim 10% on £6,000 (£7,200 – £1,200), which relates to £600.

  1. ‘What is the ‘renewals basis’ method?’ The renewals method allows you to offset the cost of ‘renewing’ or ‘replacing’ an item in a property. This replacement method can be used for a fully furnished property, an unfurnished property’ or even a partly furnished property.

Unlike the 10% wear and tear allowance, there are no restrictions as to when this rule can be used.

However, there are some important points of which you should be aware if you decide to use this method.

a)     You cannot offset the initial cost of an item! This is a VERY IMPORTANT point, which many landlords get caught out with.

If you purchase a property and decide to fully furnish it with new or even second-hand items, then you CANNOT offset the cost of providing these furnishings.

You can only offset the costs of these furnishings when you come to RENEW them!

b)     If you use this allowance, then it MUST be used for the duration of the property ownership.

You cannot move to the 10% wear and tear allowance at a later date.

  1. ‘Renewals basis’ case studies. Here are a couple of case studies to illustrate the use of this rule.

Roy buys a new house and decides to let out his previous main residence (REMEMBER, this is an excellent capital gains tax saving strategy as per Tax Strategy 3).

He leaves the existing furniture in his old house and decides to use the renewals basis.

Two years later, he spends £4,000 renewing all the furniture in the property.

This whole amount can be offset against his annual property income tax bill.

Alex buys a brand-new luxury apartment in the city centre.

He decides to spend £7,000 on ‘kitting it out’ with the best furniture and appliances.

Unfortunately, none of this can be offset against his property income tax bill because they are all ‘initial costs’!

  1. How to decide which method to use?
    There are a number of factors you should consider before deciding whether to use the ‘renewals basis’ or the ’10% wear and tear’ allowance.These are outlined below.a)     Furnished, unfurnished, or partly furnished? Remember, you can only use the 10% wear and tear rule for a fully furnished property!

The ‘renewals basis’ can be used for an unfurnished, partly furnished, or even a fully furnished property.

b)     Consider the cost of fully furnishing a property!

If you are buying a property and are going to let it out fully furnished, then you MUST consider the costs you are going to incur in initially furnishing it.

If the cost is going to be high, as demonstrated in case study 4, then it may be better use the 10% wear and tear allowance.

This is because of the following.

    • You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years.
      Therefore you will have to wait this period of time before you can claim the ‘renewals’ basis.
    • If you decide to sell the property before you renew the furnishings, then by using the ‘renewal basis,’ you will not have managed to offset any renewals cost at all against your property.

However, if you use the ’10% wear and tear allowance,’ then you can claim this from the date you purchased the property.

c)      Consider how often you will need to replace the furnishings.

If you believe that you will need to renew them on a regular basis, i.e., 2-3 years, then it may well be beneficial to use the ‘renewals basis.’

This may particularly be the case if you are providing accommodation to students.

If you don’t expect to replace it for at least 5 years, then the ’10% wear and tear’ rule may be more suited.

d)     Consider when you plan to sell. If you plan to sell the property quickly, i.e., in less than five years, then it is extremely unlikely that you will want to by new furniture.

Again, you might be best suited to opt for the 10% wear and tear method.