The term ‘depreciation’ as it relates to property (particularly buy to let investments) can be looked at in two ways. These are (1) depreciation of non-fixed goods in a fully furnished rental apartment or house, and (2) capital depreciation (i.e. if the capital value of the property falls). The latter is unusual, although it is occurring in certain areas of London right now, and southern regions, if looked at in a year-on-year context.
Replacement of Domestic Items Relief
Furniture, fixtures or fittings all typically experience wear and tear over a period of time, until eventually they need to be replaced. The type of items that come under these categories include sofas, curtains, coffee tables and other furniture – as well as crockery, white goods, kitchen appliances and TVs.
The landlord applies to deduct the cost of replacing such item of furniture (or a fixture and fitting) from his annual tax return. This replacement relief allowance takes the place of the former Wear and Tear Allowance. The latter – where landlords were automatically entitled to deduct a straightforward 10% from the profits of their net rental income – was abolished in 2015 and replaced in 2016. The relief is only available to landlords who pay income tax (and not landlords of limited companies who pay corporation tax).
The new relief payment involves the landlord deducting the cost of a replacement item from the net profit from the rental property, when he or she fills out a self-assessment tax return.
It only applies to items of a similar standard or the nearest modern equivalent i.e. a landlord couldn’t replace a sofa picked up at a charity shop for £200 with a Knoll sofa worth £2,500 and claim for the cost of the upmarket sofa. You would, in fact, only be able to claim the £200 replacement cost. The new item must also be an improvement on the original and any income made from the latter must be deducted from the tax relief (i.e. if the original sofa had been sold for £30 to a friend etc).
Landlords are also entitled to claim for any costs involved in removing the original item, such as transport to take it to a nearby recycling unit. Other items a landlord can deduct from his net rent received include property management, council tax, water rates, contents insurance, accountants fees etc).
Most landlords would replace domestic items at the start of a new long-term tenancy. If, for instance, there was a new bed for £300, a TV for £250 and a new washing machine at £290 (and £50 disposal) then it’d be possible to claim relief on £890.
Most properties gain in terms of capital value over the years (indeed this can be a substantial sum over a couple of decades). The property market does fluctuate, however, and there are times when property becomes over-inflated (which was exactly the situation several years ago in Central London, when there was a large increase in foreign buyers). Now that the market there has settled (for various reasons including increased stamp duty and the uncertainty surrounding Brexit), property prices are falling to more realistic levels. These will flatten out for a time, but once demand increases, values will no doubt continue to rise.