Tax benefits of capital allowances on rental property Capital allowances on investment properties are a way of gaining tax relief on certain types of capital expenditure. They are treated as a business expense and allow you to write off the cost of an asset over a period of time on certain rental properties (residential and commercial). What are the basics of tax benefits of capital allowances? Capital allowances are similar to a tax-deductible expense and are available in relation to qualifying capital expenditure incurred in the provision of certain assets in use for the purposes of a trade or rental business. Business expenditure can be termed trading expenditure or capital expenditure. If an item has a lasting benefit for the company (such as plant and machinery), then it is usually considered capital expenditure. The main aim of capital allowances is to claim a percentage of the cost of the expenditure back against a company’s taxable income or profits. This reduces the tax bill and allows you to write off the capital expenditure cost over time. Capital allowances on investment properties are a great way of saving tax when your business buys a capital asset. If you bought a property or incurred capital expenditure on plant or machinery in use for a trade or rental business, you can claim it. What are the tax benefits? Utilising capital allowances to claim tax relief on expenditure can deliver the following benefits: – Claim an immediate tax benefit – Reduce tax liability – No restriction on high earners claiming wear and tear allowances – Improve cash-flow – Possible repayment of tax – Not a ‘specified relief’ It is worth discovering more about capital allowance claims to ensure you gain all the benefits. What is Annual Investment Allowance (AIA)? The Annual Investment Allowance (AIA) enables companies to claim 100% of the cost of plant and machinery for the business, in the year it is purchased. The AIA is an important form of tax relief for all business owners, providing tax relief at 100% for assets up to the value of £200,000. You can only use your AIA within the first year you buy the company asset. If you choose not to claim the AIA in the year you buy the plant or machinery, you cannot claim tax relief the following year. You cannot claim AIA for leased equipment that you have previously purchased and moved to your new business premises or items for business entertainment. Are there different types of capital allowances on investment properties? Capital allowances give tax relief on tangible capital expenditure by allowing it to be deducted against annual taxable income. This means you can deduct some or all of the item’s value from profits before you pay tax. Businesses can claim capital allowances tax relief when they buy assets that are used in the business. These assets can include: – equipment – machinery – business vehicles – computers – integral building features – renovating business premises in disadvantaged areas – research & development – know-how & intellectual property – patents – extracting minerals – dredging – structures and buildings It is worth reviewing where expenditure can be included in the above allowances when making any claims on investment properties. What types of expenditure qualifies? The most common assets which you may purchase and that will qualify for capital allowances are: – car – van – computer – tools – specialist machinery The main items that are not eligible for capital allowances tax relief include the cost of buildings or property, although it is possible that part of the cost of the building might relate to integral features or fixtures. You will only be able to claim capital allowances relating to a building if it is not a residential property (unless it is a furnished holiday letting) and the property is used for business purposes, such as an office or shop. We hope you can see the tax benefits of making capital allowance claims on investment properties. Can I claim capital allowances on investment property? Capital allowances tax relief are available to anyone who is buying or building commercial property or furnished holiday lets. You can claim these allowances on certain purchases or investments. You can deduct a proportion of these costs from your taxable profits to reduce your tax bill.