Posted by Simon Misiewicz on 24th April 2014
Does the cost of refurb give you a hernia?
Would reclaiming cost of refurb provide some relief?
Tax issues need to be diagnosed and understood for a remedy to be implemented.
In most cases property investors have residential properties whereby they can claim replacement and repairs on their refurbishment works. However, where there has been improvement such as better kitchens or bathrooms to provide more space for tenants, then these costs may not be tax allowable. They can be claimed at 18% per annum as part of capital allowances.
But that means that you are investing heavily into a property without getting any tax relief. I feel that this is unfair, don’t you? Shall we see what vaccine can be given for the tax problem?
AIA. These initials will not mean too much to you at all but I am sure if you invest in HMOs and are looking to reduce your tax liability then you will not forget these three wonderful initials.
If you would like to know more about “Replacement & Repairs” see reference point (1).
Applying the right tax reducing medicine to your tax illness.
AIA stands for Annual Investment Allowance. This can be used to offset 100% of costs against your tax liability. This only applies to business assets rather than normal residential properties and is only relevant to shared areas.
AIA has now been increased from £25,000 to £250,000 so if you are investing heavily into HMOs then you can claim a significant part of your refurbishment costs.
For more information on the increase of AIA please see reference point (2).
Here is a list of costs that may be claimed as capital allowances under AIA for property investors.
• Computers and all kinds of office furniture and equipment.
• Vans, lorries, trucks, cranes and diggers.
• ‘Integral features’ of a building or structure, see CA22320.
• Other building fixtures, such as shop fittings, kitchen and bathroom fittings.
• All kinds of business machines, such as printing presses, lathes and tooling machines.
• Tractors, combine harvesters and other agricultural machinery.
• Gaming machines, amusement park rides.
• Computerised /computer aided machinery, including robotic machines.
• Wind turbines and fibre optic cabling.
If you would like a more comprehensive list of qualifying costs then please see reference point (3) and (4).
Once you have exceeded the maximum amount of £250,000 then you can still claim “WDA”, which stands for Writing Down Allowance of items in common areas. These rates may be different for the types of assets that you own. For more information on WDA please see reference point (3).
At this time I know that I have spoken about numbers and now we need to paint a good picture to help you see how this works.
Where relevant, you can choose to allocate expenditure to the most advantageous allowances that are available.
Lets say you are self-employed, preparing accounts for the period 6 April 2011 to 5 April 2012, and in that period you spent £60,000 on new electrical and heating systems for your business and £70,000 on general equipment and a new van.
You can allocate your £100,000 AIA first to the £60,000 spent on integral features (since these would otherwise only attract the 10 per cent WDA). This leaves an AIA of £40,000 that you can allocate to your £70,000 general equipment expenditure leaving a balance of expenditure of £30,000. Finally, you can allocate the £30,000 expenditure to the main pool and claim a WDA of 20 per cent of £30,000 – £6,000 – leaving £24,000 to be carried forward to the next accounting period.
If you pay Income Tax and you spent £100,500 on furniture and machinery during the 2011-12 tax year, you have no balance carried forward from the previous accounting period and made no disposals in the period, you can claim the full £100,000 AIA.
The balance of £500 can be then added to the main pool. Because the unrelieved expenditure of £500 is less than £1,000 and you have no “brought-forward” main pool. You can claim the remaining £500 as the WDA for small pools, leaving the main pool carried forward with a nil balance.
Applying the treatment
Now we have identified the treatment here are a few ways that you can apply it to your tax pains.
The cost of items previously explained cannot be deducted as an expense. They need to be entered into your self assessment or Corporate tax return as a “capital allowance” to provide a clear audit trail of what allowances have been claimed.
You are advised to speak with your accountant on this very point to ensure that the accounting treatment of costs and capital allowances are correctly calculated.
If you would like to know more about making more money and paying less tax on your HMO then see reference points (5) and (6).
If you would like to know more about savings VAT, another 15% cost savings then please see reference point (7).
If you are looking for an accountant or thinking of changing your current accountant because they do not understand property investing then please book an “Initial Free Consultation” on the below website http://www.optimiseaccountants.co.uk/accountancytaxservices/
Please ensure that you check out our latest webinars and courses http://www.optimiseaccountants.co.uk/events-appointments/
1. Claim Refurbishment Costs Against Your Taxable Property Income
2. Annual Investment Allowance Increased
3. HMRC Capital Allowances – Plant
4. PMA: Qualifying expenditure: Annual Investment Allowance
5. Making More Money, Paying Less Tax
6. Maximising Your Cash Flow On HMO Properties