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Question & Answer Service - Sample Answer

Question:
I have just acquired a property and am keen to reduce my ongoing income tax bill as much as possible. I am not sure whether to offer it furnished or unfurnished but want to know what to consider when deciding whether to use the '10% Wear and Tear' Allowance or the 'Renewals' basis method?


Answer:
There are a number of factors you should consider before deciding whether to use the 'renewals basis' or the '10% wear and tear' allowance.

These are outlined below.
  1. Furnished, unfurnished, or partly furnished? Firstly, you can only use the 10% wear and tear rule for a fully furnished property!

    The 'renewals basis' method can be used for an unfurnished, partly furnished, or even a fully furnished property.
  2. Consider the cost of fully furnishing a property!
    If you are buying a property and are going to let it out fully furnished, then you MUST consider the costs you are going to incur in initially furnishing it.

    If the cost is going to be high, then it may be better use the 10% wear and tear allowance.

    This is because of the following:
    • You will be providing high-quality furnishings and will not expect to replace them for a good few years, i.e., 5-7 years.
      Therefore you will have to wait this period of time before you can claim the 'renewals' basis. This is because you are not able to claim the initial costs that are incurred when furnishing a property.

      So, for example if you spend £7,500 furnishing a brand new property before you let it then none of this cost can be offset against your income.
    • If you decide to sell the property before you renew the furnishings, then by using the 'renewal basis,' you will not have managed to offset any renewals cost at all against your property.

      However, if you use the '10% wear and tear allowance,' then you can claim this from the date you purchased the property.
  3. Consider how often you will need to replace the furnishings.
    If you believe that you will need to renew them on a regular basis, i.e., 2-3 years, then it may well be beneficial to use the 'renewals basis.'

    This may particularly be the case if you are providing accommodation to students.

    If you don't expect to replace it for at least 5 years, then the '10% wear and tear' rule may be more suited.
  4. Consider when you plan to sell
    If you plan to sell the property quickly, i.e., in less than five years, then it is extremely unlikely that you will want to by new furniture.

    Again, you might be best suited to opt for the 10% wear and tear method.
Summary:
As you can appreciate, the decision really relies on your property investment strategies, as both are better suited to differing scenarios. The pointers above should help you to decide for yourself.