Replacement of Domestic Items relief is introduced in the 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.
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
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.