Capital allowances save you tax on buy-to-let properties & Furnished Holiday Lettings (FHL) Property Capital Allowances Claiming capital allowances on commercial property Tax benefits of capital allowances on rental investment properties Capital allowances for Furnished Holiday Lets Landlords focus on Furnished Holiday Lettings (FHL) rather than standard single-let buy-t0-let properties. This is because there are several tax benefits of Furnished Holiday Lets. 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 provide more significant tax relief. You can claim capital allowances on commercial buildings or serviced accommodation, also known as Furnished 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. There are many untapped tax reliefs for landlords when they invest in Furnished Holiday Lets. The availability of capital allowances can be an important consideration in selling or purchasing a Furnished Holiday Let. Please see how we can help you save tax through property capital allowances. Please note that the FHL capital allowances act as tax-deductible expenses. What are the basics of these deductible expenses? As property accountants serving thousands of UK landlords who purchase buy-to-let properties or Furnished Holiday Lets (FHL), 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 deductible allowable expense 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 FHLs & 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 a 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, such as toilets, lifts and lighting, must be fixed to the property. 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. There are many more allowable tax-deductible expenses. This is why you need to work with a property tax specialist. What are Capital Allowances for property investments & Furnished Holiday Lets Commercial buildings that attract tax relief for capital allowances purposes are – Shops – Restaurants – Hotels – Warehouses – Factories – Offices (but not within your own home) The above items are allowable tax-deductible expenses. Understanding income tax and VAT on furnished holiday lets is advisable 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 are obtained and correctly interpreted to provide a comprehensive claim that gains 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. This means you do not miss out on the allowable tax-deductible expenses. What are plant and machinery and how does it save tax? Tax reliefs when investing in Furnished Holiday Lets 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% tax relief. Most plant and machinery falls within the main rate of 18% tax allowable deductible expenses Certain assets in a building are designated as integral features and qualify for allowances at a lower special rate if the expenditure was incurred because of them. Other assets with more than 25 years of working 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. Can you now see the benefit of these allowable tax-deductible expenses? How can I claim Capital Allowances that are allowable tax-deductible expenses? A seller of a building that claimed capital allowances would need to identify the tax reliefs obtained. This figure must 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 property’s value for future buyers. Read this from HMRC to find out more about claiming capital allowances. Claiming capital allowances is a great way to obtain tax relief for those that invest in commercial buildings or Furnished Holiday Lets (FHL). Do not miss out on these essential allowable tax-deductible expenses Are there fundamental for landlords that own Furnished Holiday Lets and commercial property? The main points of Furnished Holiday Lets and commercial property 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 capital allowance for a landlord claim category is plant and machinery. These are all allowable tax-deductible expenses. 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. When unsure of the rules, working out what to claim is often best left to a tax professional. 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. Annual Investment Allowance tax relief 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). Annual Investment Allowance (AIA) have saved thousands for landlords that have invested in commercial property and Furnished Holiday Lets (FHL). Ensure you do not miss out on the allowable tax-deductible expenses through Capital Allowances. How do I work out your tax 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, the 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. When working out a capital allowance claim, it is worth consulting the HMRC’s property income manual. Structures and buildings allowances and the 130% Super deduction relief 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.
