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This article appeared in the Yorshire Post on Saturday, 7 March, 2009
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Loan advice for Yorkshire firms

David King is a Tax Consultant at Garbutt & Elliott Chartered Accountants, who have offices in Leeds (telephone 0113 273 9600) and York (01904 464100). David can be contacted at the York office, or by email to dking@garbutt-elliott.co.uk.
Know the golden rules of lettings to prevent a taxing headache

The position regarding relief against tax for capital expenditure can be confusing, and depends on the nature of the letting.

For this purpose we can effectively allocate property lettings into one of four categories:

  • unfurnished residential lettings;
  • furnished residential lettings;
  • furnished holiday lettings;
  • commercial lettings.

A detailed analysis of the distinction between the four categories is beyond the scope of this article.

Generally, a furnished residential letting is one in which the tenant could live reasonably well without having to provide any furniture or equipment of his own, and a furnished holiday letting is a furnished residential letting that satisfies certain availability and letting requirements.

There are essentially four systems of relief, some of which are available only to certain categories of letting.  These are:

  • capital allowances on items within the property and let to the tenant;
  • capital allowances on equipment used for the maintenance and upkeep of the property;
  • renewals allowance for the renewal of furniture and furnishings; and
  • the “wear and tear” allowance for the renewal of furniture and furnishings.

The allowances available for the four categories of letting are as follows:

Unfurnished residential lettings

Although the property is unfurnished the landlord will often provide curtains and carpets.

No relief is available for the initial cost of these items but relief may be claimed for the net cost of replacing them.

Capital allowances cannot be claimed for items included in a residential property and let to the tenant, but may be claimed for equipment used for the maintenance and upkeep of the property.

Furnished residential lettings
As with unfurnished residential lettings, no relief is available for the initial cost of furniture and furnishings provided, but relief may be claimed for the net cost of replacing them, when they are replaced.

Alternatively, the landlord may claim an annual wear and tear allowance of 10% of the ‘net rent’ received in lieu of the actual cost of replacement. The net rent is arrived at by deducting charges and services that would normally be paid by the tenant, but which are, in fact, borne by the landlord, such as water charges and council tax. 

Again, capital allowances cannot be claimed for items included in a residential property and let to the tenant, but may be claimed for equipment used for the maintenance and upkeep of the property.

Furnished holiday lettings

Unlike ordinary residential lettings, capital allowances may be claimed for both items included in the property and let to the tenant and equipment used for the maintenance and upkeep of the property. 

The recent introduction of a 100% capital allowance means that most qualifying expenditure may effectively be claimed in full in the year in which it is incurred. 

Because capital allowances are available, neither the renewals allowance nor the wear and tear allowance is strictly available, though it does seem that in practice some inspectors of taxes will allow claims, particularly where a property moves in and out of qualifying as a furnished holiday letting. 

Repairs

The replacement of items that are an integral part of a building is not normally regarded as capital expenditure and relief may be claimed in full. These items would include central heating, baths, showers, WCs, kitchen units etc.  The deductible cost is limited to the cost of replacement on a like-for-like basis or with the nearest modern equivalent.  Any significant element of improvement over the original will not be allowed as repairs, but may qualify for capital allowances depending on the nature of the letting, as described above.

Overseas lettings
The position is essentially similar to that for UK lettings, though the special rules relating to furnished holiday lettings do not apply.