Capital allowances rental property

simon

Simon Misiewicz

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.

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

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The frequently asked questions about saving property tax by claiming capital allowances

As property accountants, we are regularly asked about saving property tax using capital allowances. We will look to answer the below questions in this Article.

“Are you paying too much property tax?”

“Should you speak to a property tax expert?”

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

“What are the Capital Allowances for business properties?”

“What are plant and machinery allowances?”

“How can I claim Capital Allowances on properties?”

“Are there key Capital Allowances rules for landlords?”

“How do I work out my Capital Allowances claim?”

“How does this affect Hong Kongers looking to move or invest in the United Kingdom from Hong Kong?”

“How does this affect American readers looking to move or invest in the United Kingdom from the United States?”

Are you paying too much property tax?

Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise tax whilst building their wealth.

There are many reasons why people pay far more buy to let property tax than they need to.

This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available.

-Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.

-Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

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Should you speak to a property tax expert?

Capital allowances help landlords save tax on commercial buildings, and it is vital to get the right advice to maximise the tax relief available.

Speaking to a property tax expert can allow landlords and property investors to make the most from capital allowances when buying or selling a building.

If you’re unsure about how to save tax by claiming capital allowances, speak to one of our property tax teams.

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.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

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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.

130% Super Deduction

A new ‘super deduction’ capital allowance was created in the March 2021 budget announcement. HMRC created a factsheet and guidance.

From 1 April 2021 until 31 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

What is plant and machinery?

Most tangible capital assets used in the course of a business are considered plant and

machinery for the purposes of claiming capital allowances.

There is not an exhaustive list of plant and machinery assets. The kinds of assets which may

qualify for either the super-deduction or the 50% FYA include, but are not limited to:

– Solar panels

– Computer equipment and servers

– Tractors, lorries, vans

– Ladders, drills, cranes

– Office chairs and desks,

– Electric vehicle charge points

– Refrigeration units

– Compressors

– Foundry equipment

Example

A company incurring £1m of qualifying expenditure decides to claim the super-deduction

Spending £1m on qualifying investments will mean the company can deduct £1.3m

(130% of the initial investment) in computing its taxable profits

Deducting £1.3m from taxable profits will save the company up to 19% of that – or

£247,000 – on its corporation tax bill.

Have a question about property investments, tax or being an expat?

There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.

Free

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Capital Allowances for structures & buildings

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

What is the criteria?

You will be able to make a claim if you

– Have spent money in the current tax year

– You must have paid some or all the costs towards the purchase, construction or renovation of the structure

– not have been used as a residence the first time it was used or during the period you’re claiming

– The building must be used for trade, profession or vocation activities

– UK or overseas (again, only if it is non-residential and used in a trading activity)

If you claim this allowance and the structure is sold or demolished you may have to pay more Capital Gains Tax or Corporation Tax than usual.

You should check if claiming the structures and buildings allowance is right for you.

What is the allowable capital allowances claim?

You can only claim on construction costs, which include:

– fees for design

– preparing the site for construction

– construction works

– renovation, repair and conversion costs

– fitting out works

– A claim has been made under a different allowance for the property in question

– Cannot be claimed here if it is claimed under plant & machinery

– Other items included in the price of the structure, such as land, integral features and fixtures

– Planning permission

– Finance costs (loans or interest)

– Public enquiries or legal expenses

– Landscaping

– Where you have received a government grant

You can claim the amount you spent on construction costs, even if you lease the structure from somebody else.

The value of the structures and buildings will also vary

– Bought the property from the developer. You claim the lower of:

– – paid to the developer when they sold it

– – you paid for the structure

– Bought the property from someone that is not a developer you claim the lower of:

– – the price you paid for the structure

– – the original construction cost

If you buy a used structure from somebody that is not a developer, you can claim the structures and buildings allowance on the same amount that the previous owner was entitled to claim.

– Corporation Tax

– – 2% for money spent during the period 29th October 2018 and 31st March 2020

– – 3% for money spent after 1st April 2020 onwards

– Income Tax

– – 2% for money spent during the period 29th October 2018 and 5th April 2020

– – 3% for money spent after 6th April 2020 onwards

How does it work in practice?

The allowance period is 33 and one-third years from the allowance period start date.

The allowance period start date is the later of:

– the date the building is first used for a non-residential purpose

– the date the qualifying expenditure is incurred

The Capital Allowances claims will be done on your next tax return. It is important to ensure that the disclosure is clear to the tax authorities with the below in mind

– Allowances claimed

–  Date the building was purchased and claimed for

– The rate of claim

– Details of what the building is used for to be clear that meets the conditions above

Your allowance is adjusted if:

– Your accounting period is more or less than a year

– All conditions are not met on every day of your accounting period

– Your entitlement ends during your accounting period

– The structure is used for more than one activity

Example of the structures and buildings working in practice

You built a factory costing £900,000. All the contracts for works were entered into on 7 January 2019.

The factory was completed on 21 November 2019 and you started to use it in your engineering business from 1 December 2019. You prepare accounts for each year ending on 31 December.

In your chargeable period to 31 December 2020, you can claim 2% a year for 96 days from 1 January 2020 to 5 April 2020, and 3% a year for 270 days from 6 April 2020 to 31 December 2020.

96/366 × £900,000 × 2% = £4,722

Plus 270/366 × £900,000 × 3% = £19,919

Total claim £24,641 for the year ended 31 December 2020.

Keep a note of all the days you claimed the 2% rate for in this period or an earlier period. If you do not sell or dispose of the structure within 33 and one-third years from the start of the allowance period, you may claim for any shortfall in allowances at the end of that time.

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