Replacement of domestic items relief

Replacement of Domestic Items relief is introduced in residential property business to replace the 10% wear and tear allowance. The wear and tear allowance has been abolished. And, the replacement of domestic items relief is available for the tax year from 6 April 2016 onward.

Domestic items

Generally, you may still claim the 10% wear and tear allowance, if you are calculating income tax liability for rental income falls in period up to 5 April 2016.

From 6 April 2016, you may start to claim the replacement of domestic items relief. In other words, you can claim the cost of replacing furniture and fittings, the domestic items for your buy to let properties. The relief covers the following domestic items.

  • Movable furniture for example beds, free-standing wardrobes.
  • Furnishings for example curtains, linens, carpets, floor coverings.
  • Household appliances for example televisions, fridges, freezers.
  • Kitchenware for example crockery, cutlery.

In short, the Replacement of Domestic Items relief is available and apply to unfurnished, part furnished or fully furnished residential property.

Replacing old furniture – beyond repair

You may claim the replacement of domestic items relief when you replace a piece of broken furniture that beyond repair in your buy to let property. The new furniture must be for your tenants’ enjoyment in that property.

To clarify, this relief only available for replacement of domestic items not the initial cost of getting the items for your property.

Upgrade of old furniture – modern furnishing

On one hand, if you are replacing your broken furniture in your buy to let, an upgrade version. For example, a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction. No relief is available for the £150 difference.

When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.

Meanwhile, changing the functionally, say from a sofa to a sofa bed, means the replacement is not substantially the same as the old item.

For this purpose, changing the material or quality of the item also means the replacement is not substantially the same as the old item. For instance, you upgrade from synthetic fabric carpets to woolen carpets, the replacement is not substantially the same as the old item so there has been an improvement.

If the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge. Then, this is not considered to be an improvement. Thus, the full cost of the new item is eligible for relief.

In the example above, if you later purchase a replacement sofa bed for use in that buy to let property. Accordingly, you would be able to claim the full cost of this new sofa bed. As a rule, provided there was no improvement on the old sofa bed. And, the old sofa bed is beyond repair or no longer available for use in that property.

Calculate the replacement of domestic items relief

Universally, when calculate the relief, you must take into account if your old domestic item is sold or part exchanged for the new item. And also the incidental costs of disposing of the old item or acquiring the replacement item.

The formula to work out the relief for the new item is as follows:

  • 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

For example

Sheila has replaced a single, wooden framed bed in her rental property with a new double divan bed. The new double bed is an improvement on the old bed and Sheila paid £400 for it. Which is significantly more than the £150 it would have cost if she had replaced the old bed with a new equivalent wooden framed bed. Therefore Sheila cannot claim more than £150 of the purchase cost as a deduction. Sheila also paid an additional £20 to have the new bed delivered but managed to sell the old bed online for £30.

Sheila needs to work out how much he can claim as a deduction:

  • Cost of new replacement item limited to the cost of an equivalent new item £150
  • Add the delivery charges £20
  • Less proceed from selling the old bed £30
  • Amount deductible under Replacement of Domestic Items Relief is £140.

Furnished holiday Let

If you replace a domestic item in a property which qualifies as a Furnished Holiday Let. The Replacement of Domestic Items relief is not available. However, you will continue to claim capital allowances on these items.

Rent A room

If you use the Rent a Room Scheme, the Replacement of Domestic Items relief is also not available.

10% Wear and Tear allowance

You cannot claim the 10% Wear and Tear allowance while also utilizing the Replacement of Domestic Items relief.

Corporation tax

Every limited company is required by law to pay corporation tax on their profit. The HM Revenue and Customs (HMRC) will send reminders requesting the filing of your CT600. The reminders would be sent to your registered office. What is CT600? Good question. It is effectively a corporation tax return form. HMRC called it CT600.

Before anything else, you must first prepare your company accounts. This is a different document to that of the confirmation statement.

This would include the profit and loss account which gives you the profit figure to compute your tax liability. However, if you made a loss, then no tax liability. In simple term, no profit means no tax to pay.

You have nine after your accounting year-end to pay your company tax. Thereafter, you must submit your corporation tax return together with your tax computation to HMRC. You must also include your company accounts. You have 12 months after the accounting year ended to state your final corporation tax bill in your CT600.

Otherwise, your company will receive late filing penalty if failed to file the return on time. There will also be penalty interests on any outstanding corporation tax amount.

Corporation tax for Large Company

A company with an accounting profit of more than £1.5 million is classified as a large company by HMRC and therefore is required to pay its corporation tax in advance in four instalments within a twelve-month period.

There is an exception. Where your company’s accounting profit exceeded £1.5 million but less than £10 million for the first time in your trading year, your company will not have to pay your corporation tax by instalments.

Where there are associated companies or companies within a group, that £10 million thresholds will be divided by one plus the number of associates at the end of the previous accounting period.

Accounting records

The onus is on your company to estimate your accounting profits for the purpose of making corporation tax payments. Therefore, it is important your company have a proper accounting system in place to monitor your profits and business transactions.

Notify HMRC when your company profit is likely to exceed the thresholds. Start making quarterly instalment payments. The unpaid instalment payments carry penalty interest at a special rate imposed by HMRC, from the due date to the date of payment.

Oversight

There is no excuse for first time oversight. The HMRC will backdate the penalty interest payable based on your final corporation tax return CT600 submitted.

Quarterly Instalments Payments

Instalments are due at the intervals of three months commencing 6 months and 13 days from the start of your accounting period and culminating 3 months and 14 days from its end.

Therefore, for the 12 month accounting period there will be 4 instalments.

For a company with a 12 month accounting period starting on 1 January, Quarterly Installment Payments will be due on 14 July, 14 October, 14 January and 14 April.

Annual tax on enveloped dwellings

A limited company owns residential property in the United Kingdom with the property valued more than £500,000 is required to pay an Annual Tax on Enveloped Dwellings (ATED). Below are the annual charge payable based on the value of your property.

ATED for 2019 and 2020

Property value1 April 2019 to 31 March 20201 April 2018 to 31 March 2019
More than £500,000 up to £1 million£3,650£3,600
More than £1 million up to £2 million£7,400£7,250
More than £2 million up to £5 million£24,800£24,250
More than £5 million up to £10 million£57,900£56,550
More than £10 million up to £20 million£116,100£113,400
More than £20 million£232,350£226,950

ATED for 2017 and 2018

Property value1 April 2017 to 31 March 20181 April 2016 to 31 March 2017
More than £500,000 up to £1 million£3,500£3,500
More than £1 million up to £2 million£7,050£7,000
More than £2 million up to £5 million£23,550£23,350
More than £5 million up to £10 million£54,950£54,450
More than £10 million up to £20 million£110,100£109,050
More than £20 million£220,350£218,200

ATED for 2015 and 2016

Property value1 April 2015 to 31 March 20161 April 2014 to 31 March 2015
More than £500,000 up to £1 million
More than £1 million up to £2 million£7,000
More than £2 million up to £5 million£23,350£15,400
More than £5 million up to £10 million£54,450£35,900
More than £10 million up to £20 million£109,050£71,850
More than £20 million£218,200£143,750

Your company must complete the Annual Tax on Enveloped Dwellings return and submit it with HM Revenue and Customs.

Seek accountants advice if you are not familiar with ATED.

In addition to ATED filing, your company must also submit company accounts and confirmation statement to Companies House, a corporation tax return and VAT returns if you are a VAT registered company to HM Revenues and Customs.

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