Landlords – when is a replacement an improvement and why does it matter?
We are often asked by our landlord clients to clarify the difference between a replacement item of furniture, furnishing, household appliance or kitchen ware as opposed to a purchase that may be considered an improvement. The difference is critical, as it determines whether a cost is tax deductible or not.
As from April 2016, the new Domestic Items Relief (DIR) was introduced. To qualify for the DIR the following points need to be considered:
- Unlike the old Wear and Tear allowance, for the new Domestic Items Relief to apply the dwelling house can be unfurnished, part furnished or fully furnished.
- An expense must be incurred on purchasing a replacement domestic item, the ‘new item’.
- The new item must also be solely provided for use by the tenants in a dwelling house and the old item must no longer be available for use in that dwelling house.
- The initial cost of purchasing domestic items for a dwelling house isn’t a deductible expense for tax purposes so no tax relief is available for that cost. Tax relief is only available for replacement items.
It is then necessary to consider whether the new item is an improvement over the replaced item.
HMRC have outlined the following points and examples:
- If a new sofa would have cost you £400 but you buy a sofa bed instead, which cost you £550, you could only claim the £400 as a tax deduction and no tax relief is available for the £150 difference.
- When considering if the new item is an improvement over the old one, the test is whether the replacement item is or isn’t the same, or substantially the same, as the old item.
- Changing the functionally (from a sofa to a sofa bed for example) means the replacement isn’t substantiallythe same as the old item.
- If you do have a sofa bed and later purchase a replacement sofa bed for use in that dwelling house, you would be able to claim the full cost of that new sofa bed. That’s provided there was no improvement over the old sofa bed and the old sofa bed is no longer available for use in that dwelling house.
- Changing the material or quality of the item also means the replacement isn’t substantially the same as the old item. If you upgrade from synthetic fabric carpets to woollen carpets, the replacement isn’t substantially the same as the old item so there has been an improvement. You may wonder how likely it is that HMRC are going to come and examine your carpets however!
- If the replacement item is just a reasonable modern equivalent, for example a fridge with improved energy efficient rating compared to the old fridge, this isn’t considered to be an improvement and the full cost of the new item is eligible for relief.
One final point.
When you first purchase a property to let, make sure that figures are shown in the contract to cover the values of the domestic appliance items which are included in the purchase.
In this way, when you replace these items at a future date it will make it that much easier to demonstrate eligibility for Domestic Items Relief.
If you are a landlord that needs advice, contact THP Chartered Accountants in Wanstead, Cheam, Chelmsford, Saffron Walden or London City today.