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Claiming Tax Relief for Capital Expenditure - Part 2

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Claiming Tax Relief for Capital Expenditure - Part 2

Tax Article
In the second of this series of articles on Capital Allowances, we’ll be looking at the scope for claiming tax relief in various categories of property business. As before, hotels and property development businesses are outside the scope of these articles.  Instead, we’ll look at general residential properties, commercial properties, blocks of flats and houses in multiple occupancy, and, finally, furnished holiday lettings.


Residential Properties

Normal residential properties probably offer the least scope for claiming Capital Allowances. As we touched on in the first article, Capital Allowances cannot be claimed on assets physically located in dwelling areas in normal residential properties (but we’ll look at the special rules for blocks of flats/ houses in multiple occupancy and furnished holiday lettings later).


But that still leaves scope to claim Capital Allowances on fixed assets used elsewhere in the property business, such as:


• Office equipment – perhaps the business is run from an office at home and there is a computer, printer, desk, etc.


• Other tools used in the business – perhaps for maintenance, decorating or gardening.


• Car used in the business – there is obviously a significant amount of expenditure here, but it is important to bear in mind that, just as with all Capital Allowances claims, the claim can only represent the proportion of business use of the asset – private use of the asset must be disallowed.


Example – Private Use Adjustment


Dave buys a laptop to use in his new property business; he estimates that he uses it most of the time for work but 20% of the time for non-business purposes. The laptop cost £500.


He also has a car which he bought for £8,000 a couple of years ago. The car is worth £5,000 when the property business starts. He uses the car to travel to the property for maintenance, to collect rents and materials for decorating and the like. He calculates that he uses the car about 25% of the time for the property business, as he doesn’t do a lot of driving generally.

 

                                        Laptop            Car             Private Use            Claim

2011/12                              £                  £                       £                          £

Additions     
Laptop                                500   
Car                                                        5,000  
Allowances    
AIA                                     (500)                                      100                    (400)
WDA                                                     (1,000)                750                    (250)

                                                           -------------                                    -------------
Claim                                                                                                           (650)
Carry Forward                      -                 4,000  

 

2012/13    
Brought Forward                                    4,000  
WDA                                                      (720)                 540                     (180)

                                                         --------------                                    --------------

Claim                                                                                                          (180)
Carried Forward                                     3,280  

 

Please Note:


The 100% Annual Investment Allowance (AIA) can be claimed for most assets - but not cars.


Cars are eligible for either the standard 20% rate of Writing Down Allowance (WDA) per annum, or if their CO2 emissions exceed 160g/km then they only rank for 10% per annum - these rates are due to fall to 18% and 8% respectively, next year.


For each asset with private use, Capital Allowances are calculated separately - the assets are not pooled.


Assets acquired before the business starts - if they were otherwise used beforehand, then apply market value at commencement; if not then treat as acquired for cost on the first day.


So, even normal residential properties offer scope for some real tax savings.


Commercial Properties


Non-residential properties generally offer more opportunities to claim Capital Allowances.

 Eligible expenditure can cover things like:


1. General electrical wiring;


2. Lighting systems;


3. General water supply;


4. Lifts;


5. Central heating and similar;


6. Air-Conditioning;


7. Security and fire safety systems;


8. Telecommunications / IT systems;


9. Kitchen and washroom facilities;


10. Electric roller shutters and doors;


11. Shelving and other fixtures; and


12. Furniture supplied by the landlord.


...But Watch Out for ‘Integral Features’


For expenditure incurred since April 2008, the first 6 categories listed above have fallen into a special class known as ‘Integral Features’. These are more closely associated with the fabric of the building itself and, as such, they suffer from a reduced rate of Allowance: they are added to the ‘special rate pool’ which means that they benefit only from 10% annual Capital Allowances instead of the normal 20% per annum.


It is, however, possible to choose to claim the 100% Annual Investment Allowance against expenditure falling within the Integral Features category in priority to the special rate pool, thereby avoiding the more restrictive rate.


Blocks of Flats and Houses in Multiple Occupancy


A landlord who owns a block of flats will be letting out several dwellings in a single building. The rule which prohibits Capital Allowances claims for dwellings does not extend beyond the confines of the residences themselves, which means that Capital Allowances may be claimed in ‘non-dwelling’ areas, such as lobbies, stairways and lifts. Eligible expenditure in these buildings can therefore extend to:


• Security / fire safety systems


• Intercoms / door-entry systems


• Lighting, heating and power


• Lifts


It is likely that eligible expenditure in blocks of flats, etc., will fall into the Integral Features categories described above.


‘Houses in Multiple Occupancy’ is a term used to describe residential properties with separate living accommodation but with shared facilities such as kitchens, bathrooms and common rooms. Student ‘halls of residence’ are a common example.


Essentially, Houses in Multiple Occupancy are treated like blocks of flats. The distinction was relevant in respect of expenditure incurred before 22 October 2010 – prior to that date, HMRC used to accept that the common areas such as kitchens, bathrooms and lounges fell outside the ‘dwelling’ exclusion, so that expenditure in these areas could qualify for Capital Allowances. Expenditure incurred now in respect of these common areas doesn’t qualify, but there will still be tax returns yet to be filed, or ‘open years’, where the more generous rules may apply.


Furnished Holiday Lettings


Where properties qualify under the Furnished Holiday Lettings (FHL) regime, then Capital Allowances can be claimed on eligible assets even in the dwelling areas of buildings – kitchen and bathroom fittings, furniture, carpets, curtains, and the Integral Features referred to above.


Whilst these rules are favourable, the conditions for properties to qualify as FHLs are quite restrictive, the main ones being:


• Must be available to let to the public for at least 140 days a year – 210 days from April 2012


• Must actually be let for at least 70 days a year – 105 days from April 2012, and


• Lettings must be on a short term basis – a property should not normally be let to one tenant for more than 31 days


Practical Tip


In this article we have demonstrated that most property businesses should be eligible to claim at least some Capital Allowances – even in respect of residential property lettings where there are restrictions in respect of assets in the properties themselves.


However, do take care to account for any ‘private use’ of assets.


Where there are ‘Integral Features’, it will probably be beneficial to allocate any Annual Investment Allowance to that expenditure first – bearing in mind that any such expenditure not covered by the AIA will only get 8% Capital Allowances a year, come April 2012.


In the next article, we’ll look at how the rules work to allow claims to be maximised – not just on the cost of the assets themselves.In the second of this series of articles on Capital Allowances, we’ll be looking at the scope for claiming tax relief in various categories of property business. As before, hotels and property development businesses are outside the scope of these articles.  Instead, we’ll look at general residential properties, commercial properties, blocks of flats and houses in multiple occupancy, and, finally, furnished holiday lettings.


Residential Properties

Normal residential properties probably offer the least scope for claiming Capital Allowances. As we touched on in the first article, Capital Allowances cannot be claimed on assets physically located in dwelling areas in normal residential properties (but we’ll look at the special rules for blocks of flats/ houses in multiple occupancy and furnished holiday lettings later).


But that still leaves scope to claim Capital Allowances on fixed assets used elsewhere in the property business, such as:


• Office equipment – perhaps the business is run from an office at home and there is a computer, printer, desk, etc.


• Other tools used in the business – perhaps for maintenance, decorating or gardening.