Are you buying a property that you can claim capital allowances for?
Have you sold a property that you have claimed capital allowances for?
What are capital allowances?
Capital allowances are allowances for plant and machinery in a building. The building normally constitutes items such as:
- business vehicles, eg cars, vans or lorries
- parts of a building considered integral, known as ‘integral features’
- some fixtures, eg fitted kitchens or bathroom suites
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- electrical systems, including lighting systems
- external solar shading
Capital allowances do not include items such as:
- things you lease — you must own them
- buildings, including doors, gates, shutters, mains water and gas systems
- land and structures, eg bridges, roads, docks
- items used only for business entertainment, eg a yacht or karaoke machine
How does this relate to property investors?
Much of the above may not seem relevant to property investors, but here’s what it means for you:
- For property investors capital allowances could include items in shared areas within houses in multiple occupation (HMOs), such as bathroom and kitchen furniture items. HMRC have given the example where, “the item is in the common parts of a residential building, eg a table in the hallway of a block of flats”.
- For commercial buildings such as offices, holiday accommodation and even serviced apartments this will include all the furniture, light fittings, window fittings, etc. For more detail on dealing with capital allowances and commercial properties such as holiday lets, see my previous article.
- There will also be things that you do not see, such as lighting and heating systems that have boilers, fuse boxes, pipes and wiring that all constitute as plant and machinery.
The big benefit of capital allowances
In general if you make a loss on your property income you cannot offset this against your Pay As You Earn (PAYE), only against future property income. However, capital allowances can be offset against your other income, as I outlined in this previous article.
Let’s take as an example George, who is a higher rate taxpayer. He spends £20,000 on refurbishment works on a HMO. This may be claimed as his annual investment allowance (AIA) (see table below) against his property profit of £10,000. This will leave £10,000 worth of losses that may be offset against his PAYE. As such George will receive a cheque back from HMRC of £4,000, being the 40% tax he paid on the equivalent salary.
How much can you claim?
HMRC have stated that you can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax.
The rates and time periods for AIA are as follows:
|Sole traders/partners||Limited companies||AIA|
|From 1 January 2016||From 1 January 2016||£200,000|
|6 April 2014 – 31 December 2015||1 April 2014 – 31 December 2015||£500,000|
|1 January 2013 – 5 April 2014||1 January 2013 – 31 March 2014||£250,000|
|6 April 2012 – 31 December 2012||1 April 2012 – 31 December 2012||£25,000|
|6 April 2010 – 5 April 2012||1 April 2010 – 31 March 2012||£100,000|
|6 April 2008 – 5 April 2010||1 April 2008 – 31 March 2010||£50,000|
If you have purchased an asset and you make a claim after the first year of purchase or some assets do not qualify (speak to a capital allowances specialist on this) then the assets will be pooled and you will be able to claim:
- main pool with a rate of 18%
- special rate pool with a rate of 8%
- single asset pools with a rate of 18% or 8% depending on the item
Main rate pool
Add the value of all ‘plant and machinery’ you’ve bought to the main rate pool, unless they’re in:
- the special rate pool
- a single asset pool, eg because they have a ‘short life’ or you’ve used them outside your business
Special rate pool
You have to claim a lower rate of 8% on:
- parts of a building considered integral — known as ‘integral features’
- items with a long life
- thermal insulation of buildings
What’s changed since April 2014
The bad news on current capital allowances rules came with the new fixtures rules. The tax legislation relating to fixtures within buildings was amended by FA 2012, Sch 10. These legislative changes (CAA 2001, s 187A and s 187B) initially came into force in April 2012 as “transition measures” and became fully operational from 1 April or 6 April 2014, for corporation and income tax, respectively.
Solicitors will now need to declare if the property has any plant and machinery items that may have capital allowances claimed against them. This is irrespective of whether the capital allowances have been claimed by the previous owner.
HMRC have stated that the buyer of a building that contains fixtures can only claim plant and machinery allowances (PMA) if the expenditure on the fixtures is pooled before the sale.
The seller and buyer must also either:
- formally agree a value for fixtures within two years of a transfer
- start formal proceedings to agree the value within that time
A receiver can’t make an election on behalf of either the buyer or the seller. You should use the election procedure to make an election in writing to HMRC.
It must contain:
- the amount fixed by the election
- the name of each person making the election
- enough information to identify the fixture and the relevant land
- details of the interest gained by (or the lease granted to) the buyer
- the tax district references of each person making the election
The election is permanent and cannot be changed after it has been made. You can make the election up to two years after the buyer bought the property or is granted the lease. You must include a copy of the election with each person’s tax return for the first period that’s affected by it. This will normally be the period in which the disposal or purchase takes place.
If the current and past owner can’t agree an apportionment, either can apply to the first-tier tribunal to decide the value of the fixture. You must make the application before the end of the relevant two-year period. You’ll satisfy the fixed value requirement when the tribunal decides the value.
A step by step guide to this strategy
It is one thing to understand the theory but it is another to implement the above successfully. That is why we have created a step by step guide:
- You will need to buy a property that is suitable for capital allowances.
- You will need to check with the seller’s solicitors whether or not there is plant and machinery that allows capital allowances to be claimed. It is equally important to understand if capital allowances have already been pooled.
- Once you have carried out the purchase and additional works to the property it is recommended that you seek a capital allowances specialist to see what capital allowances you may now claim.
- Pass the capital allowances reports received from the capital allowances specialist to your accountant/tax adviser so that they can make the relevant entries onto your self assessment.
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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