By Neil Driver
Capital allowances are a really popular way of businesses reducing their annual tax bill and with so many different forms of relief on offer, there has never been a better time to make use of them.
However, it is estimated that less than 10 per cent of UK commercial property owners have claimed capital allowances, despite them being able to access this relief.
Similarly, while most residential property owners can’t make use of capital allowances, those with furnished holiday lets can, but often don’t.
As a result, every year billions of pounds of unused allowances are missed, which could help property investors to reduce their tax bills.
Capital allowances are available to landlords, developers and investors incurring capital expenditure either buying or building commercial property or furnished holiday lets. In some cases, it may even be possible to make a retrospective claim on previous investments.
Capital allowances on commercial properties
There are a wide range of capital allowances available to non-residential let properties. One of the most significant is the super-deduction announced in the Finance Act 2021, which offers a 130 per cent relief against qualifying plant and machinery expenditure incurred by companies between 1 April 2021 and 31 March 2023.
This works alongside the 50 per cent first-year allowance for qualifying special rate assets, that was introduced at the same time, which together offer a considerable tax saving to developers and investors in commercial property.
To use these tax schemes a business must be incorporated as a limited company. However, unincorporated businesses, such as partnerships and sole traders, can still make use of capital allowances via the Annual Investment Allowance (AIA) or Writing Down Allowance, which applies to certain types of qualifying plant and machinery, which can be found here.
At the moment a temporary extension to the AIA, which boosts the allowance from £200,000 to £1 million, remains in place until 31 March 2023, so business owners should take full advantage of this opportunity to save more.
Do not leave this too late, as any expenditure beyond this date will need to be apportioned using a complex system, which may significantly reduce the amount that can be claimed.
The owner of a commercial property may even be able to claim allowances on capital expenditure incurred by the previous owners if no claim was previously made.
On top of this, if you build, buy or lease a structure and all construction contracts were signed on or after 29 October 2018, you may be able to claim structures and buildings allowance tax relief.
Using this allowance, you can claim on expenditure for:
- Fees for design
- Preparing the site for construction
- Construction works
- Renovation, repair and conversion costs
- Fitting out works.
For incorporated limited companies this offers Corporation Tax relief, while for other businesses it offers income tax relief. Rates vary depending on when the expenditure was made and can be found here.
Capital allowances on residential property lettings
Although more limited, capital allowances can be claimed on some forms of residential property. In most cases the relief outlined above that provides relief on qualifying expenditure on plant and machinery cannot be claimed on property businesses that involve a ‘dwelling house’, i.e., a regular residential rental property.
However, a Furnished Holiday Letting (FHL) is treated for income tax purposes as a trade, which means that regular dwelling house capital allowance restrictions do not apply to qualifying FHLs.
Similar to relief for commercial properties, a structures and buildings allowance is available for ordinary property businesses offering similar relief on a structure and all construction if you build, buy or lease a property and the contracts were signed on or after 29 October 2018.
Although most landlords of furnished and unfurnished properties cannot claim capital allowances, they can use the Replacement of Domestic Items Relief.
However, while landlords may not be able to claim capital allowances on the properties they own, they may be able to claim capital allowances on the cost of office furniture and equipment, including motor vehicles, used in their own business.
Want to access capital allowances?
If you think part or all of your property portfolio could benefit from capital allowances, now is the time to take advantage of this often-overlooked relief. Please contact us to find out how we can assist you.