Tax Relief for Furnished vs. Unfurnished Rental Properties

This article examines some key tax considerations for landlords, including Replacement of Domestic Items Relief, allowable expenses, capital allowances and mortgage interest relief.  

Furnished vs. Unfurnished Rentals

What Qualifies as a Furnished Rental Property?

A furnished rental property includes enough furniture and appliances for a tenant to move in and live comfortably without needing to supply their own. Typically, these items include:

• Beds, mattresses, pillows and bedclothes

• Sofas, tables, chairs and wardrobes

• White goods such as a fridge, washing machine and dishwasher

• Cutlery, crockery and kitchen utensils

While there is no precise statutory definition of "furnished" for tax purposes, HMRC generally considers a property to be furnished if it contains enough for immediate occupation. Furnished properties sometimes attract short-term tenants, such as students, professionals and corporate lets.  

What Qualifies as an Unfurnished Rental Property?

An unfurnished rental property usually includes only basic fixtures and fittings, such as:

• Built-in kitchen units and bathrooms

• Flooring

• Essential white goods

Tenants of unfurnished properties typically provide their own furniture. While described as "unfurnished," such properties may still include some white goods sometimes, in which case tax relief may apply when these have to be replaced.  

Tax Relief Options for Furnished and Unfurnished Rentals

Replacement of Domestic Items Relief

Historically, landlords of fully furnished properties could claim a 10% wear and tear allowance on their rental income to account for furniture depreciation. However, this was replaced in April 2016 with Replacement of Domestic Items Relief (RDI Relief), which applies to all landlords who provide and replace domestic items, regardless of whether the property is furnished or unfurnished.

What Can Be Claimed Under RDI Relief?

Landlords can deduct the cost of replacing:

• Sofas, chairs and dining tables

• Beds and mattresses

• Carpets, curtains and blinds

• White goods (for example, fridges, washing machines and dishwashers)

This relief applies only to replacements, not to the initial purchase of items when first furnishing a property. Additionally, if a landlord replaces an item with a more expensive version, only the cost of a like-for-like replacement is tax deductible.

For example, if a landlord replaces a £500 washing machine with a £700 model, only £500 can be claimed as an expense for tax purposes.

Does RDI Relief Apply to Unfurnished Properties?

While RDI Relief is often associated with furnished rental properties, it can also apply to unfurnished properties if the landlord provides domestic items that require replacement. For example, if an "unfurnished" property includes a fridge or washing machine, the cost of replacing these items is still eligible for tax relief.

Applicability:

• Furnished rentals

• Part-furnished rentals

• Unfurnished rentals (if replacing provided items such as white goods)  

Allowable Expenses for Landlords

Both furnished and unfurnished property landlords can deduct allowable expenses from their rental income, reducing their taxable profit. These expenses must be wholly and exclusively for the rental business and include:

• Mortgage interest (subject to Section 24 restrictions, if applicable, i.e. only 20% of mortgage interest credited at the basic 20% rate of income tax)  

• Council tax, utility bills and service charges (if paid by the landlord)

• Property management and letting agent fees

• Repairs and maintenance (excluding capital improvements)

• Landlord insurance

• Advertising costs

• Legal and accounting fees

These expenses apply equally to furnished and unfurnished rental properties, helping landlords reduce their tax liability.  

Capital Allowances: Are They Available to Landlords?

Capital allowances provide tax relief on qualifying capital expenditures, typically for business assets. However, most residential landlords cannot claim capital allowances on furniture, and fixtures and fittings. Instead, the cost of replacing domestic items is covered under Replacement of Domestic Items Relief.

Exceptions: When Can Landlords Claim Capital Allowances?

There are two key exceptions where capital allowances apply:

1. Furnished Holiday Lets

Properties that qualify as Furnished Holiday Lets (FHLs) under HMRC’s criteria are treated as a trading business rather than a standard rental activity. This distinction allows FHL landlords to claim capital allowances on items such as:

• Furniture (for example, beds, sofas and dining tables)

• Kitchen equipment (for example, ovens, hobs and fridges)

• Heating systems and boilers

• Electrical systems and security features

To qualify as an FHL, the property must:

• Be available for letting for at least 210 days per year

• Be actually let for at least 105 days per year

• Not have long-term occupation by the same tenant for more than 31 days (with exceptions for some circumstances)

If the property meets these conditions, landlords can deduct the cost of qualifying capital assets from their taxable profits, reducing their overall tax liability.

2. Commercial Property

Landlords of commercial properties (such as offices, warehouses or retail spaces) can also claim capital allowances on fixtures and integral features used in the business. This can include air conditioning systems, and lighting, heating and security systems.

For standard residential landlords, “capital” expenditure on items such as furniture is not deductible against rental income but may be capable of being considered when calculating Capital Gains Tax (CGT) upon selling the property. However, it is best to consult a suitably qualified accountant on such matters.

Mortgage Interest Relief and Section 24

Prior to 2017, landlords could deduct 100% of their mortgage interest costs from rental income before calculating tax. However, under the Section 24 tax changes, this relief has been gradually restricted and since April 2020 landlords receive only a basic rate tax credit (20%) on only 20% of their mortgage interest payments.

Who Is Most Affected by Section 24?

• Higher-rate taxpayers (40% or 45%) face higher tax bills as they can no longer deduct 20% of their mortgage interest at their highest tax rate.

• Lower-rate taxpayers (20%) are less affected, although they still receive relief on only 20% of their mortgage interest at their basic tax rate.

Furnished Holiday Lets (FHLs) remain exempt from Section 24 and still qualify for mortgage interest deduction in full for tax purposes.  

Conclusion

Understanding allowable expenses, mortgage interest relief and replacement relief is essential for landlords looking to manage their tax liability efficiently. Seeking professional tax advice can ensure compliance with HMRC regulations while maximising tax savings.

FAQs:

1. Can I claim tax relief on furniture and appliances in a furnished rental?

Landlords of furnished or part-furnished properties can claim Replacement of Domestic Items Relief (RDI Relief) when replacing items such as sofas, beds, carpets and white goods. However, this applies only to replacements, not to the initial purchase when furnishing the property for the first time. If an item is upgraded, only the cost of a like-for-like replacement is deductible.

2. Do landlords of unfurnished properties qualify for Replacement of Domestic Items Relief?

Yes, but only if the landlord provides and replaces certain domestic items. While "unfurnished" properties typically do not include furniture, some landlords supply white goods such as a fridge or washing machine. If these are replaced, Replacement of Domestic Items Relief can be claimed on a like-for-like replacement basis as far as replacement cost is concerned.

3. Can residential landlords claim capital allowances on furniture, and fixtures and fittings?

Standard residential landlords cannot claim capital allowances on furniture, and fixtures and fittings. However, landlords of Furnished Holiday Lets (FHLs) can claim capital allowances on assets such as furniture, kitchen equipment and heating systems, as these properties are treated as a business under HMRC rules.

4. How has mortgage interest tax relief changed under Section 24?

Before April 2020, landlords could fully deduct mortgage interest costs from their rental income for tax calculation purposes. However, under Section 24, landlords now receive only a basic rate (20%) tax credit on only 20% of their mortgage interest payments. This affects higher-rate taxpayers even more, as they cannot offset event 20% of their mortgage interest at their higher tax rates if they fall into the 40% or 45% income tax bands. This restriction applies to both furnished and unfurnished properties. However, Furnished Holiday Lets (FHLs) remain exempt and mortgage interest on them can still be deducted in full for tax purposes.