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A Guide to Replacement of Domestic Asset Relief

Published by Susan Basnet
Posted Date: June 5, 2024 , Modified Date: June 5, 2024
Categories: Tax Relief

Unlocking perks for landlords is the government’s way of encouraging the letting of residential properties. Amongst various reliefs and exemptions available to landlords, one particularly exciting relief is the Replacement of domestic asset relief!

This article serves as your VIP pass to understanding everything you need to know about maximising this relief. Ready to level up your property game?

Understanding Replacement of Domestic Asset Relief

Brought into force to replace the Wear and Tear Allowance, Replacement of domestic asset relief allows landlords to claim tax relief when the domestic items on residential rental property are replaced. Essentially, when a landlord replaces a qualifying domestic item (see below), the expense incurred to acquire that item is considered an allowable expense for tax purposes. The calculation of relief can vary depending on factors such as whether the replacement is like-for-like or not. These complex cases are addressed in more detail below.

When landlords, including companies, individuals, and trusts, rent out residential properties and provide tenants with domestic items, they can take advantage of Replacement of Domestic Asset Relief.

Diving into Domestic Items

As mentioned earlier, the Replacement of Domestic Asset Relief applies explicitly to the Replacement of domestic items. But what exactly falls into this category? Let’s break it down:

Moveable Furniture – tables, stools, sofas, etc.

Furnishings – curtains, rugs, carpets, etc.

Household Appliances – washing machines, refrigerators, etc.

Kitchenware – crockery, kitchenware, etc.

It is important to note that fixtures used in rental properties do not attract replacement relief. Fixtures are any plant and machinery installed or fixed in or to a dwelling house such that it becomes a part of that dwelling house.

Domestic Asset Relief items

Fixtures include:

  • Baths
  • Washbasins
  • Toilets
  • Fitted furniture.
  • Boiler or water-filled radiator in a dwelling house

Conditions for the Replacement of Domestic Asset Relief

Income Tax Act 2005 has set the following conditions that must be met for the successful claim of the relief:

Condition A – The individual or company making a claim for the relief must carry on a property business that includes letting a dwelling house.

The relief is not available on commercial letting.

Condition B – An old domestic item provided for use in the dwelling-house must be replaced with the purchase of a new domestic item.

The new domestic item must be used for the same purpose.

Condition C – The expenditure on the new items must pass the ‘wholly and exclusively’ test.

The item must be used wholly and exclusively by the tenant on the property.

Condition DCapital Allowance must not have been claimed with respect to the expenditure on the new domestic item.

All of the above conditions must be met for the relief to be granted. If any one of the above conditions is not met, the relief cannot be claimed.

Excluded Lettings:

Not every property business can claim the Replacement of Domestic Asset relief. Specifically, the following property businesses cannot claim the relief:

Calculating Relief and Tax Implications

Now that we have established whether the relief applies to you or not, let’s understand how the relief is calculated. The available relief depends on several factors, including the type of replacement made, incidental costs, consideration received on the old item, etc. In this section, we will look into how the reliefs vary in different scenarios:

Calculating Domestic Asset Relief items

Replacement with the same item

Where the new item is the same or substantially the same as the old item, i.e. the new item is the modern equivalent of the old item. Still, there has been no improvement; the available deduction is equal to the expenditure incurred by the landlord on the new item.

Example 1, 

Mr. Shelby, a residential property landlord, had to replace an old sofa, which cost him £500.

Assuming that the new sofa is the same as the old one, Mr. Shelby can make a deduction of £500 under the relief.

Replacement with an improved item

Where the new item is not the same or substantially the same as the old item, i.e. with an evident improvement, the available deduction will be restricted to the lower of two values:

  • The cost of the new item, or
  • The cost that would have been incurred if the old item had been replaced ‘like-for-like’.

Example 2, 

This time, Mr. Shelby had to make another replacement, an old fridge. However, Mr Shelby replaced the fridge with a fridge-freezer, costing him £800. Had he bought a fridge similar to the old one, it would have cost him £500.

In this scenario, the available deduction for Mr. Shelby is restricted to £500. No relief is available for the improvement.

Incidental costs and consideration on the old item

Where the old item is disposed of, the proceeds from that disposal will reduce the available relief. On the contrary, the incidental costs associated with the disposal of the old items or the purchase of the new items, including delivery charges, installation costs, and expenses on the disposal of the old item, will increase the available relief.

Example 3, 

Mr. Shelby, replacing an old sofa on his rental property, purchased a new table for £250 and sold the old table for £50. The installation cost and delivery charges amounted to £100.

Mr. Shelby’s relief in this scenario amounts to £300 (250-50+100).

Note: While the proceeds from the old item reduce the relief, the relief on the item is increased by the incidental costs on purchase and disposal of the domestic item.  

Part Exchange

Where the old item is traded as part of an exchange for a new item, the amount exceeding the trade-in value received will be the available deduction under the relief.

Example 4, 

Mr. Shelby buys new stools costing him £500. He trades in the old stools, given a value of £100 and settles the rest of the cost with £400 in cash.

The deduction for the replacement asset item will be £400.

It’s important to note that no deduction is granted for the trade-in value of the old item.

Claiming the Replacement of Domestic Asset Relief

The domestic asset replacement relief claim is made while filing your self-assessment return. If you have an income from property in the UK, you need to submit the ‘SA105’ supplementary page to tell HMRC of your rental income and the SA100 form.

On Page 2 of the SA105 form, under the ‘calculating your taxable profit or loss’ section, you’ll find a space to claim relief for the costs of replacing domestic items (as shown below). Simply enter the amount you are eligible to claim.

Claiming the Replacement of domestic asset relief:

Conclusion

In conclusion, the Replacement of Domestic Asset Relief presents a significant opportunity for landlords to optimise their tax strategies while maintaining and improving their rental properties. By understanding the conditions, exclusions, and calculations associated with this relief, landlords can make informed decisions to maximise their tax benefits. As you embark on your property journey, remember to leverage this valuable relief to enhance the profitability and sustainability of your rental business.

Frequently Asked Questions

Is the replacement of domestic asset relief applicable to companies?

Yes, the relief applies similarly to companies letting out residential property. The conditions applicable to companies are identical to those for individuals.

What is an ‘improvement’ to the domestic item?

The term ‘improvement to the item’ is not defined in the legislation. However, the replacement will include an improvement if the new asset can do more or be used to do something it could not do before.

What advice can landlords get regarding the ‘replacement of domestic asset relief’?

The most crucial thing is to ensure that the replacement items substantially match the standard and quality of the old items. If the old and new items are not substantially the same, you cannot fully benefit from the relief as the relief will be restricted.

In addition, exercise caution when considering a claim for rent-a-room relief, especially if you plan to replace domestic assets on the exact rental property. In such cases, those assets won’t qualify for Replacement of domestic assets relief.

Need expert advice on replacement of Domestic Assets Relief ?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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