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Capital Allowances and Residential Property

Capital Allowances and Residential Property
Planning on purchasing a new computer, car or maintenance tools for your property business? Don’t forget to claim these capital allowances and possibly earn yourself a nice tax rebate in the process!

 

Capital allowances can be claimed by landlords for expenditure on “plant and machinery”. The first £100,000 of such expenditure qualifies for the “Annual Investment Allowance” (though this will reduce to £25,000 after April 2012), so that 100% of the cost can be deducted from profits in the year of the expenditure.


Such a deduction may create a large loss for the year, but whereas most losses on property lettings can only be carried forward against future letting profits, losses attributable to capital allowances can be claimed against general income (of the year of the loss, and of the following year), so there is the possibility of a chunky tax repayment in some circumstances.


The Catch!


This may sound too good to be true, and there is a problem – you cannot claim capital allowances for plant and machinery “for use in a dwelling-house”, and this cuts out a large number of potential claims.


You can, however, claim capital allowances on plant and machinery that is not within a “dwelling-house”, and HMRC accept that in a block of flats, each flat is a “dwelling-house”, but the rest of the building is not. The lifts, for example, are not within any of the flats and so they qualify for a claim for capital allowances.


Houses of Multiple Occupation (HMOs)


The same applies to HMOs. Plant and machinery in the common parts of the property (shared kitchens or bathrooms, for example) qualifies for capital allowances. Finally, “Furnished Holiday Accommodation” let according to the rules for such properties is excluded from the “dwelling-house” rule, so all the plant and machinery in FHA qualifies – though it remains to be seen whether the tax reliefs on this sort of property will be restricted from April 2011, as is currently proposed.


And There’s More!


It can get even better in the case of “second-hand” HMOs or blocks of flats. If the purchaser pays a single price for the whole building, it is necessary to apportion that price between the land, the bricks and mortar, and the qualifying plant and machinery.


HMRC’s Valuation Office has a formula for this, which is:

 

 
 

The “bare site value” is to be arrived at on the basis that the site is cleared and ready to go as a building plot, with mains services laid up to the boundaries of the site and planning permission to erect a building of the type in question.


If you play around with this formula, you will get some surprising results. The Valuation Office Agency Manual itself acknowledges that in some cases the figure thrown up by the formula for “qualifying plant and machinery” can be significantly greater than the replacement cost, which defies logic but is accepted by HMRC.


Things to Look Out For


There can be problems, of course, and such a claim is not always desirable. If the previous owner has claimed capital allowances himself, the claim is restricted to the amount on which he made his claim when he installed the plant and machinery.


In the case of Furnished Holiday Accommodation, however, it is often the case that the vendor did not use the property as FHA, and so will not have claimed capital allowances. In such a case, the apportionment could throw up a useful claim for allowances, and hence losses to set against other income.


Practical Tip


The other point to remember is that if you have made a claim for capital allowances, when you sell the property, the amount apportioned to the plant and machinery can lead to a claw back of the capital allowances and a hefty “balancing charge” – in such circumstances, good advice is essential to minimise the damage.


Footnote - On 22 October 2010, HMRC announced that they were changing the way they interpreted the expression “dwelling house”, so that the shared kitchens and bathrooms of HMOs would no longer qualify for capital allowances. This change of heart may well be challenged in the courts, but it means that claims for capital allowances for HMOs of the type described in this article will no longer be accepted by HMRC for expenditure incurred after 22 October 2010. Claims for capital allowances on Furnished Holiday Accommodation, however, are not affected by this announcement.


By James Bailey