The Association of Residential Letting Agents (ARLA) has welcomed some aspects of proposals to replace the allowance for wear and tear but has reservations about the effects that changes could have on both landlords and tenants.
In a formal response to a consultation paper by HM Revenue and Customs on replacing the allowance with tax relief on replacement furnishings, ARLA has welcomed the fact that the new relief would apply to all landlords but it wants to see the initial purchase cost of furniture included.
If it is not, the association claims that this could have a knock-on effect for tenants as landlords choose to buy less durable, cheaper furnishings in the knowledge that they will later be entitled to tax relief for replacing even poor quality items.
The association also wants to see any items that are bought by landlords after being requested by a tenant being covered by the scheme. ARLA fears that if this is not the case, landlords may be unwilling to act upon requests from tenants.
There is also speculation that some landlords will be unwilling to replace goods with better items preferred or requested by tenants because, if they are classed as being an improvement on previous items, they will not be eligible for the relief.
ARLA has also highlighted the increased administrative burden that these changes would place on landlords. They are likely to be required to produce what the association terms ‘significant’ volumes of evidence in order to ensure a successful tax relief claim.
The association claims that landlords will need comprehensive guidance to ensure that they fully understand the workings of the scheme.
One of the major changes contained in the consultation is that the tax relief will not be affected by locality and rental rates. ARLA points out that this may not properly address a link that exists between furnishing costs and rent levels.
ARLA also warns that tenants are likely to feel an impact as landlords, most of whom only have net rental yields of around four per cent, attempt to claw back lost revenue resulting from the new system.
In fact, the association says that the £705 million net benefit that the new scheme should produce for the Exchequer is likely to come from tenants’ rent increases, leaving them paying more and saving less for future home ownership.
ARLA claims that the government could have mitigated these issues by taking forward measures including Capital Gains Tax taper and roll-over relief to prompt landlords to reinvest profits they make from sales back into the private rental sector.