As a property owner of a residential property, 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.

Understanding Capital Allowances

Capital allowances are a type of tax relief that allows businesses to claim deductions for certain capital expenditures, such as equipment, machinery, and business vehicles. For property rental businesses, capital allowances are an essential tool to reduce taxable profits and lower tax liability. By claiming capital allowances, landlords can offset a percentage of the cost of their capital expenditures against their taxable income or profits, effectively reducing the amount of tax they need to pay. This not only helps in managing cash flow but also in reinvesting savings back into the property business.

Fundamentals of Rental Property Capital Allowances

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 how capital allowances impact your income tax obligations is crucial for maximizing your tax relief.

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.

In the context of a dwelling house, fixtures such as heating systems and lighting can qualify for tax deductions.

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.

Eligibility and Qualifying Expenditure

To be eligible for capital allowances, your property business must be a UK taxpayer, and the expenditure must be incurred on qualifying capital expenditures. Qualifying capital expenditures are typically items used in the property business, commonly referred to as ‘plant and machinery’. These can include equipment, machinery, business vehicles, computers, and integral building features. By identifying and claiming these expenditures, property businesses can benefit from significant tax deductions, making it crucial to understand what qualifies and how to claim these allowances effectively.

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.

• As a landlord, you are required to pay tax on your rental income, which can be reduced by claiming capital allowances.

• 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.

Types of Capital Allowances

There are several types of capital allowances available for property businesses in the UK, each with its own specific rules and requirements:

• Annual Investment Allowance (AIA): This allows property businesses to claim the full cost of qualifying capital expenditure in the tax year the expenditure was incurred, up to a specified limit.

• Writing-Down Allowance (WDA): Provides tax relief for capital expenditures over a period of years, similar to the accounting concept of depreciation.

• 100% First Year Allowance (FYA): Enables property businesses to claim a 100% deduction on qualifying capital expenditure in the year the expenditure was incurred.

• Structures and Building Allowance (SBAs): Given for the construction costs of commercial properties at a flat rate of 3% per year on a straight-line basis for 33 years and 4 months.

• Super-Deduction: A 130% tax deduction for companies incurring capital expenditure on plant and machinery from 1 April 2021 to 31 March 2023.

• Full Expensing: A 100% first year allowance introduced in the 2023 Spring Budget for companies incurring capital expenditure on plant and machinery from 1 April 2023 to 31 March 2026.

Understanding these different types of capital allowances can help property businesses maximize their tax relief and make informed decisions about their capital expenditures.

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. Calculating your capital allowances accurately can significantly impact your income tax obligations and overall tax relief.

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.

Tax Benefits of Capital Allowances

Claiming capital allowances can significantly impact the taxable profits of a property business. By reducing taxable profits, property businesses can lower their tax liability and retain more of their earnings. Some of the key tax benefits of claiming capital allowances include:

• Reduced taxable profits: By deducting the cost of qualifying capital expenditures, businesses can lower their taxable income.

• Lower tax liability: Reduced taxable profits result in a lower amount of tax payable.

• Increased cash flow: Lower tax payments mean more cash available for reinvestment or other business needs.

• Improved financial position: Enhanced cash flow and reduced tax liability contribute to a stronger financial position for the property business.

These benefits highlight the importance of understanding and claiming capital allowances to optimize the financial health of your property business.

Record Keeping and Accounting

To claim capital allowances, it is essential for property businesses to keep accurate records of their capital expenditures and ensure they meet the eligibility criteria. Records should include details of the asset, its cost, and the date it was acquired. Additionally, property businesses must ensure they claim the correct type of capital allowance and follow the proper procedures for claiming these allowances. Seeking professional advice can be invaluable in ensuring that capital allowance claims are accurate and compliant with tax laws, helping to avoid potential issues and maximize tax relief.

By maintaining thorough records and understanding the process of claiming capital allowances, property businesses can effectively manage their tax liabilities and enhance their financial performance.

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. A property tax expert can help you understand your obligations to pay tax on rental income and how to maximize your tax relief. 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.