PROPERTY TAX - 26.02.2016

Using the new renewals basis in practice

Going, going, gone

From 1 April 2016 for corporation tax and 6 April for income tax, the renewals allowance provisions in s.68 ITTOIA 2005 and s.68 CTA 2009 are being repealed. These provisions have been used in the last few years to cover some items which would (otherwise) have fallen into a black hole for partly furnished and unfurnished domestic lettings, following withdrawal of the concessionary replacement basis in April 2013.

In their place new rules allowing the deduction of expenditure on replacement furnishings will come into force from April 2016.

Pro advice. The new rules don’t provide retrospective relief for items such as white goods in unfurnished or partly furnished residential lets. HMRC’s view has been that such items were not deductible under s.68. Consider delaying any such expenditure in the run up to April, as the cost of replacement assets would be deductible from 1 or 6 April 2016.

One rule for all - almost

Replacement expenditure for furnished, unfurnished and partly furnished domestic lets is now all under the same rules: furnished holiday lets and business lets are excluded as capital allowances are available. You would think this would mean that determining allowable expenditure would be relatively straightforward; however, there are going to be subtle distinctions to make, and these will determine availability of relief.

Your clients may be confused by the changes and reversals, and will need clear guidance to decide on the best way to lay out funds. Add to this the coming restrictions in tax relief on borrowings, increased rates of SDLT/LBTT for additional properties, and faster payments of CGT; the future for landlords is challenging, and they are going to need the best pro-active advice possible from their tax advisor.

Overview

Clause 40 of the Finance Bill 2016 (see Follow up ) introduces a new s.311A into ITTOIA 2005 (replacement furniture relief). The provisions mean that no tax relief is given on the initial purchase of items used in domestic lets, but the cost of replacing these items is permitted in full. The position is mirrored for corporation tax in a new s.250A CTA 2009 .

Four conditions exist:

1. There must be a property business which includes a dwelling house.
2. A “domestic item” has been provided for use in the dwelling house (this is the old item on which no tax relief is given). The landlord incurs the expense of providing a new item to replace the old, which is solely for use of the tenant.
3. The expenditure is wholly and exclusively for the business, but is ineligible for deduction under normal rules as it is a capital expenditure. (See ss.33 and 34 ITTOIA 2005 as applied by s.272 ITTOIA 2005 (profits of a property business: application of trading income rules.))
4. Capital allowances must not be available - for example furnished holiday let businesses.

Fixtures

Fixtures are specifically excluded: that is plant or machinery “fixed in or to a dwelling-house as to become, in law, part of that dwelling-house.” Fixtures specifically include water heating systems, boilers and water-filled radiators.

This continues the need to make distinctions between, say, an Aga cooker, which is part of the fabric of the building, and a free-standing electric cooker, in the way that was required when considering whether the whole or only part of an asset was replaced.

Repairs to both cookers would be allowable under normal business deduction rules. The cost of a replacement for the free-standing cooker would fall within the new rules. But would replacement of the Aga be a repair of the asset of the house? It appears that uncertainty will still be present, and for all fixtures it will still need to be considered if there has been a repair rather than a replacement.

Furnished holiday lets

While the exclusion of furnished holiday lettings seems straightforward, there is a catch in s.311A (7) ITTOIA 2005 (and s.250A (7) CTA 2009 ). This excludes any property used for all or part of the tax year (accounting period for companies) in a furnished holiday letting business. For example, if a property which has been used as a furnished holiday let is let partly furnished on an assured shorthold tenancy from January 2017, replacement furniture allowance would not be available in the tax year 2016/17 for the partly furnished let, but would be available from 6 April 2017. So the timing of expenditure on replacement cookers/carpets is significant.

Pro advice. Transitions will therefore need careful managing if a house which has been used for domestic letting is later used for furnished holidays lets or vice versa.

Rent-a-room relief cannot be used alongside replacement furniture allowance.

Substantially the same

Replacement assets must be substantially the same as the original asset ( s.311A (9) ITTOIA 2005 ; s.250A (8) CTA 2009 ). This poses another difficulty. If the replacement is not substantially the same as the old item, then the allowable deduction is reduced.The maximum deduction is restricted to the amount which would have been incurred had the new item been substantially the same as the old one. Another problem, particularly with white goods, is that exact replacements are almost impossible to find. It is to be hoped that the “nearest modern equivalent” approach, that has permitted single glazing to be replaced with double glazing, will be continued.

Pro advice. Practically speaking, clients may need evidence to show that the item claimed is as near as possible to the original.

Incidental costs

Incidental capital costs of acquisition or disposal may be claimed as part of the replacement cost.

Any money (or money’s worth) received, or receivable, for the old item by the landlord or someone associated with the landlord, must be deducted from the replacement claim. In other words, it is the net cost of replacement which is deductible.

Used in a dwelling house

The Finance Bill 2016 uses the phrase “expenditure on a domestic item for use in the dwelling-house” . It remains to be seen how narrow this interpretation is. How far can domestic items in the dwelling house be extended? Does it include, for example, garden or patio furniture? Could it stretch to a lawn mower?

Split accounting periods

Companies with an accounting period straddling 1 April 2016 are required to apportion profits to accommodate the new rules. The parts before and after 1 April will be treated as separate accounting periods. The default apportionment method will be time basis (under s.1172 CTA 2010 ). But this may be modified and adjusted if the result is unjust or unreasonable.

End of distinction

There will no longer be a requirement to make a distinction between furnished or unfurnished property, and the 10% wear and tear allowance will not be needed after 6 April 2016.

Finance Bill 2016