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This publication is available at https://www.gov.uk/government/publications/reform-of-the-wear-and-tear-allowance/reform-of-the-wear-and-tear-allowance
Who is likely to be affected
Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.
General description of the measure
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
The measure will give relief for the cost of replacing furnishings to a wider range of property businesses as well as a more consistent and fairer way of calculating taxable profits.
Background to the measure
This measure was announced at Summer Budget 2015. A consultation was held from 17 July 2015 to 9 October 2015.
The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.
Current law providing for the Wear and Tear allowance is contained in sections 308A, 308B and 308C of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for Income Tax and at sections 248A, 248B and 248C of the Corporation Tax Act 2009 (CTA 2009 for Corporation Tax).
Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.
The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.
The amount of the deduction is:
- the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
- the incidental costs of disposing of the old item or acquiring the replacement less
- any amounts received on disposal of the old item
This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.
The renewals allowance for tools at section 68 ITTOIA 2005 and section 68 CTA 2009 will no longer be available for property businesses.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.1 of Summer Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015.
The measure is not expected to have any significant macroeconomic impacts.
A behavioural adjustment is made to take into account changes in behaviour resulting from landlords being able to deduct the costs they incur in replacing furnishings in their property.
Impact on individuals, households and families
This change will create a small additional administrative burden for individual landlords who currently claim the wear and tear allowance as they will now need to keep a record of their actual expenditure and exclude any elements of improvement. This is estimated to be around 750,000 individuals (and households), and the impact on affected individuals (and households) is anticipated to be negligible given that they currently keep records of other expenses such as repair costs.
An estimated 1.4 million individual landlords of unfurnished or part furnished properties will have a new incentive to replace furnishings in their properties, which may lead to improved tenancy conditions.
The measure is not expected to impact on family formation, stability or breakdown.
There are no expected impacts on the equality of groups sharing protected characteristics.
Impact on business including civil society organisations
Individuals who consider themselves to be in business, partnerships and companies that currently claim the wear and tear allowance will now need to keep a record of their actual expenditure and exclude any elements of improvement. It is expected that the majority of these landlords will already maintain these records in order to determine whether the business remains viable. It is estimated that this will create a small additional administrative burden for fewer than 50,000 partnerships and companies. The annual and on-going costs to these businesses are expected to be negligible. There will be a one-off cost to businesses as they familiarise themselves with the new rules and this is also expected to be negligible.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
The additional one-off costs for HMRC for implementing this change are estimated to be in the region of £100,000.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected in tax returns.