Capital allowances rental property

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

15th December 2021

Capital allowances save you tax

Capital allowances will help you save tax on your self-assessment tax return if the property is owned in your name. Alternatively, capital allowances will save you corporation tax if the property is held in your limited company.

Capital allowances allow a business to write off the cost of the assets over several years against the taxable income.

Some buildings may qualify for the new building & structure allowances, which provides more significant tax relief.

You can claim capital allowances on either commercial buildings or serviced accommodation, also known as holiday lets. These buildings contain items of plant and machinery such as lifts, heating systems, air conditioning and sanitary fittings, which may qualify for allowances. The furnished holiday let capital allowances scheme has become very popular to help investors reduce tax.

The availability of capital allowances can be an important consideration on the sale or purchase of a commercial building.

Please see how we can help you save tax through property capital allowances.

Claim capital allowances to reduce your tax bill

Complete our online form to see if Capital Allowances may be claimed against your tax bill when investing in commercial buildings, holiday lets or serviced accommodation

Online form

What are the basics of Capital Allowances on residential and commercial property?

As property accountants serving thousands of UK landlords who purchase buy to let properties, capital allowances can be confusing and complex.

Claiming capital allowances could save tax in your name or limited company. It is critical to understand the various ways to utilise them.

When you buy certain qualifying assets for your property rental business, a percentage of the cost is allowed as a tax deduction each year.

Sometimes 100% tax relief is allowed in the year of purchase because of the annual investment allowance.

Capital allowances for fixtures in commercial properties have become a specialised topic, and the rules are complex and ever-changing.

Capital allowances for commercial properties are potentially valuable.

Tax relief may typically be available for between 15-45% of the cost of a property.

The value of the allowances often comes from the fixtures in the property.

A fixture is defined as plant or machinery installed or fixed in or to a building.

The term plant or machinery includes tables, chairs, computers and much more, but none of these items are fixtures.

The fixtures must be fixed to the property, such as toilets, lifts and lighting. These may be referred to as integral fixtures.

Capital allowances cannot be claimed in your business accounts for fixtures and fittings that are not affixed to the building

It is essential to understand the commercial property tax benefits for investors.

What are the Capital Allowances for property investments?

Commercial buildings that attract tax relief for capital allowances purposes are

– Shops

– Restaurants

– Hotels

– Warehouses

– Factories

– Offices (but not within your own home)

It is advisable to understand income tax and VAT on furnished holiday lets before investing.

To benefit from capital allowances, you can own property either privately in your name or as a Limited company.

Capital allowances are available to any property investor incurring capital expenditure from buying or building commercial properties or furnished holiday lets. A furnished holiday let capital allowances claim could save you tax now and in the future.

These allowances can be claimed on certain purchases or investments, and you can then deduct a proportion of these costs from your taxable profits and tax.

Tax legislation covering the availability of capital allowances is complex.

Specialist property tax expertise is vital to ensure that the critical information and documentation is obtained and correctly interpreted to provide a comprehensive claim that gains the full tax relief.

The most common failure in identifying eligible expenditures for capital allowance claims arises when property businesses do not identify items of plant and machinery within buildings they own.

Prominent plant and machinery assets that make up the fabrication of a building include heating and cooling systems, emergency lighting, security systems and sanitary ware.

Capital allowances do not need to be claimed when the cost is incurred.

It is possible to claim missed allowances from several years ago to when a property was initially acquired.

As long as the items are still in use for the purpose of the trade, it may be possible to claim tax relief dating back to when the property was first purchased.

Claim capital allowances to reduce your tax bill

Complete our online form to see if Capital Allowances may be claimed against your tax bill when investing in commercial buildings, holiday lets or serviced accommodation

Online form

What are plant and machinery allowances?

Details of what constitutes plant and machinery can be found in HMRC guidance.

There are two types of capital allowance: the main rate of 18% and the special rate of 8%.

Most plant and machinery falls within the main rate of 18%.

Certain assets in a building are designated as integral features and qualify for allowances at the lower special rate if the expenditure was incurred because of them.

Other assets with a working life of more than 25 years are designed as life-long assets and qualify for allowances at a special rate.

Property businesses can claim an annual investment allowance for capital expenditure incurred on most items of plant and machinery, providing 100% tax relief of the capital allowances identified.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

How can I claim Capital Allowances on a property investment?

A seller of a building that claimed capital allowances would need to identify the tax reliefs obtained. This figure will need to be brought into the seller’s capital allowance computations.

Similarly, a buyer hoping to claim capital allowances regarding plant and machinery in a building will need a figure on which to claim allowances from the seller.

Suppose the buyer can claim allowances regarding plant and machinery in the property, which constitutes a fixture. In that case, tax legislation requires the parties to enter into an election or Section 198 election to fix the value at whatever amount they choose.

Buyers need to determine the seller’s capital allowances position as early as possible to take the necessary steps to preserve the capital allowances.

Valuable capital allowances can be lost or left unclaimed.

It is also vital for non-taxpayers such as pension funds to pay attention to the capital allowances position and obtain the necessary information when buying properties.

Although they cannot claim allowances, they can still preserve the value of the allowances and therefore increase the value of the property for future buyers.

Read this from HMRC to find out more about claiming capital allowances.

Are there fundamental Capital Allowances rules for landlords?

The main points of capital allowances rules for landlords to remember are:

– The property business must own the asset

– The asset must be for general business use and not tied to a particular property

– The tax relief applies to capital spending

– Property business capital allowances apply to long-term rented homes, not holiday lets

– Capital allowances can reduce profits or increase losses

– Capital allowances are tied to the property business accounting period

Capital allowances are special tax relief on the tools and equipment landlords’ need to run a property business.

They typically apply to one-off purchases, not day-to-day property business expenses.

Capital allowances cannot be applied to residential property.

The main category for a capital allowance for a landlord claim is plant and machinery.

This includes vans, tools, ladders, computers, office furniture and equipment in common areas of a shared house.

Capital allowances are open to sole traders, partnerships or Limited companies.

Working out what to claim is often best left to a tax professional if you are unsure of the rules.

The legislation introduced in the Autumn Finance Bill 2021-22 to maintain the current temporary £1,000,000 AIA limit for one year and three months from 1 January 2022, which will align the end of the temporary AIA limit with the end of the super-deduction.

Transitional rules will apply where a business has a tax period that spans the operative date of 1 April 2023 for the reversion of the AIA limit to £200,000. Under such rules, the maximum AIA available should be calculated in two parts, with apportionments made just and reasonable.

The AIA is available based upon the £1,000,000 temporary limit for the proportion of the tax period falling before 1 April 2023.

The AIA is available based upon the £200,000 limit for the proportion of the tax period falling on or after 1 April 2023.

 

Annual Investment Allowance example

Based only on these transitional rules and apportioning by reference to the number of months, the maximum AIA available to a company with a 12-month tax period from 1 January to 31 December 2023 would be £400,000, calculated as follows.

1) The period from 1 January to 31 March 2023: £1,000,000 x 3/12 months = £250,000

and

2) The period from 1 April to 31 December 2023: £200,000 x 9/12 months = £150,000

The maximum entitlement is also affected by when the qualifying expenditure is incurred. In this example, if the total qualifying expenditure for that tax period amounts to £500,000 and is incurred by 31 March 2023, the amount eligible for AIA is limited to £400,000. If it was incurred after that date, it is limited to £150,000.

There are more detailed transitional rules for businesses subject to income tax and a tax period spanning the date of the decrease of the AIA limit on 1 April 2023.

There are also more detailed transitional rules about entitlement to AIA, such as group companies, or when businesses under common control are regarded as “related”.

These transitional rules are based on similar time-apportionment principles applied to the laws in section 51K of CAA (operation of the annual investment allowance where restrictions apply).

Claim capital allowances to reduce your tax bill

Complete our online form to see if Capital Allowances may be claimed against your tax bill when investing in commercial buildings, holiday lets or serviced accommodation

Online form

 

How do I work out my Capital Allowances claim?

Few property businesses will spend more than the AIA on buying new business assets in a year, so list the assets and reduce the whole amount via a self-assessment or corporation tax return.

The amount is then deducted from your property business profit or added to the loss.

If you are in profit, tax due in the year is reduced by the relief, while if you make a loss, then carry the amount forward to reduce profits in future years and still gain the relief.

It is worth consulting the HMRC’s property income manual when working out a capital allowance claim.

Structures and buildings allowances and the 130% Super deduction

A new ‘super deduction’ capital allowance was created in the March 2021 budget announcement.

From 1st April 2021 until 31st March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:

– a 130% super-deduction capital allowance on qualifying plant and machinery investments

– a 50% first-year allowance for qualifying special rate assets

HMRC updated the capital allowance for structures and buildings on 3rd September 2020.

 

Need advice?
Contact us now

Enquire about our ongoing services

Book a call to discuss our property accountancy services

Get in touch

Book a paid for tax consultation

Use the code “Art20” to get 20% discount

Book now

Book a call to see how we can help you.

Consultation options.

We offer the two following options for initial consultations.

CALL OPTION ONE

Our Ongoing Accountancy Services

Fixed price irrespective of how many properties you have

We charge on a fixed monthly fee

  • - Accounts submitted to HMRC & Companies House

  • - 60 minute onboarding tax call

  • - Unlimited 30 minute tax calls

  • - An holistic review of your tax structure and future plans

  • - Annual tax return review to discuss future tax plans

Our Monthly Accountancy Services

CALL OPTION TWO

Tax Consultation + Tax Report + Video Recording

(Free for clients)

Want tax advice right now? Book today

  • - Upload your questions in advance

  • - Our Tax Advisors collectively discuss your questions

  • - A qualified tax advisors discuss the very best solution with you

  • - A tax report & meeting recording is sent within 24 hours

  • - Clarification questions are answered via email

Tax call from £124.95

Booking your appointment.