As a property owner, you may be able to claim capital allowances on fixtures on your rental property. Capital allowances legislation is crucial as it outlines the provisions and entitlements for tax relief, eligibility criteria, and the role of HMRC. Since there is too little clarity on capital allowances among the masses, you might not be working out the right amount of capital allowances claim. This article will give you complete information on calculating capital allowances beginning with the fundamentals of the rule.

Fundamentals of Capital Allowances on Rental Property

Capital allowances can be a confusing and overwhelming concept for many landlords. It becomes essential to seek professional expert help to decode this topic and figure out the capital allowances about your property.

Understanding the process of claiming capital allowances is crucial, as it involves knowing the seller’s capital allowance position, pooling expenditure, and entering into section 198 elections, which can significantly impact both buyers and sellers.

Every time you purchase certain assets for your rental property, a percentage of the costs incurred could be allowed for tax deduction every year. At times, you could also enjoy a 100% tax relief for the year of asset purchase, thanks to the annual investment allowances.

Businesses can claim these allowances for past expenditure incurred on items like air conditioning, wiring, heating, lighting, and security systems, even from several years ago, providing potential tax benefits without upfront costs.

Capital allowances can be claimed by any property investor who has incurred capital expenditure while buying or building furnished holiday lets or commercial properties. You can claim these allowances on certain purchases or investments.

You can claim capital allowances on holiday lets and commercial property, and if the property is in your name, you can claim it in your self-assessment tax return form. Certain fixtures, such as air conditioning, heating, lifts, sanitary fittings and more, in the property, qualify for capital allowance claim. Additionally, certain items like heating systems and air conditioning are considered integral features and are subject to specific rules and allowances under the Capital Allowances Act 2001, which can provide significant tax relief.

What is a Fixture?

A fixture is any item of plant or machinery usually fixed or installed in a building. You should not confuse the terms plant and machinery with computers, tables and chairs, since none of these items are fixed.

A fixture is anything that is fixed securely to the property. For example, lifts, toilets, lighting. If the fixtures are not integral parts of your building or not affixed to the property, they can’t be claimed as a part of capital allowances. Plant and machinery allowances can be claimed on these fixtures and fittings contained in commercial properties, covering assets like lifts, toilets, and lighting, which qualify for these allowances.

What do the Basic Rules regard Capital Allowances for Landlords?

• The property can be claimed in your name or when registered as a Limited company.

• Capital allowances on commercial properties could bring a tax relief from 15% to 45% of the property cost. For capital allowance purposes, it is crucial to determine the eligibility of assets for capital allowances and to preserve these allowances for future buyers when selling or purchasing properties.

• You can claim missed allowances from many years if the business still uses the items. Machinery allowances, including plant and machinery allowances, are important to maximize tax relief, with specific rates such as the main rate of 18% and the special rate of 6%.

• You can claim capital allowances on commercial and holiday lets owned by you. It doesn’t matter if you built it or how long you have owned it. As long as you own it, you can claim capital allowance.

How Should I Claim Capital Allowances on Property Investments?

If you are selling a commercial or holiday let, you should identify the items you had claimed tax relief. Identifying and claiming valuable allowances is crucial in property investments to preserve their value and avoid potential adverse effects on the property’s value.

If you are a buyer, you can claim capital allowances on plant and machinery provided the seller has identified the items you can claim for allowances. For example, a central heating system qualifies for capital allowances and can be deducted in computing profits for a property rental business.

To make sure you don’t lose out on valuable capital allowances, you should take steps to determine the capital allowances applicable as early as possible.

Calculating Capital Allowances Claim for Property Owners

The AIA or the Annual Investment Allowance limit of £1,000,000 has been extended for one year and three months starting from January 1st, 2022. This temporary limit will end around the same time as Super-Deduction. For the tax period after April 1st 2023, you can calculate the AIA on the £200,000 limit. Capital allowances provide tax relief for capital expenditure for which a revenue deduction is not available, with special rules applying to integral features.

Some businesses might spend over their AIA limit on purchasing business assets in a particular year. You should list all the assets purchased in a specific tax period and reduce the amount using your self-assessment tax form if this happens. This amount will then be reduced from business profit or added to your business loss. In other words, if your business is making a profit, the relief amount will be reduced from the tax due. For tax purposes, it is crucial to understand what forms the asset or ‘entirety’ to determine deductible expenses and capital expenditures.

The latest budget announcement from the Government talks about 130% Super Deduction. From April 1st 2021, to March 31st 2023, businesses investing in plant and machinery assets can claim,

• The company can claim a 130% super-deduction capital allowance on all the qualifying plant and machinery assets.

• For all special rate assets, a 50% allowance for the first year can also be claimed.

Why Should You Speak with a Property Tax Expert for Tax Relief?

Capital allowance can be a challenging and confusing topic for many landlords. You must seek help from property tax experts for legal support and guidance so that you can take complete advantage of the benefits you might receive. As a landlord, you can save tax amounts to a large extent, and if you are still unsure about the entire process, we suggest you speak to our property experts.