This is the third in a series of articles looking at Capital Allowances tax reliefs for standard property businesses (nb. the guidance does not cover hotels, property development businesses or other more ‘niche’ property activities).
In this article, we are going to look at 3 key features of the general Capital Allowances regime which can prove particularly useful for property owners/investors:
• “Late” Claims
• Ancillary costs
• Claims based on Value
How Late Can I Make a Claim?
The short answer is that claims must be made in a tax return, and that the claim must be lodged within the normal amendment/’repair’ period of the tax return. For individuals, this is usually 31 January after the tax return filing deadline itself – being 31 January after the tax year in question. (So whilst the 2010/11 tax return filing deadline is generally 31 January 2012, the return can in most circumstances be amended any time up to 31 January 2013). For companies, the filing deadline is normally 12 months after a company’s accounting year-end, with the ‘repair period’ ending 12 months later. (So for a company with a 30 April 2011 year end, it will generally have up to 30 April 2013 to make or amend a Capital Allowances claim).
So, there are very roughly two years to lodge a claim, from the tax year/period when expenditure was incurred. And this frequently catches taxpayers out. But what some tax inspectors don’t appear to know, is that you can still claim – just in a later year. (We did say we had some good news for people who were worried that they might have ‘missed the boat’).
The legislation to back this up can be found in the Capital Allowances Act 2001 - primarily CAA 2001 ss 57 & 58 (Note - guidance from HM Revenue & Customs on this point is very thin on the ground). The legislation allows the taxpayer to choose to add qualifying expenditure to the running balance of the Capital Allowances pool immediately in the year/period in which the expenditure is incurred; or to wait and to add it later.
So let’s say a property was bought personally in 2006. Of course it is now too late to amend a tax return for 2006. But if the purchase price included items eligible for Capital Allowances, then that expenditure can still be claimed now – for instance by including it in the tax return for 2010/11, or even by amending the 2009/10 tax return.
There are, however, a couple of important points to bear in mind:
1. The option to claim ‘later on’ is only open if you still own the asset at the time of the later claim; and
2. You can only claim ‘normal’ Capital Allowances this way: it’s too late to claim the 100% Annual Investment Allowance, which does have to be claimed in the period of actual expenditure.
This basically means that “it’s never too late” to make a claim for Capital Allowances, even if a property was bought many years ago (provided the asset is still held).
There are many firms of surveyors – some of which have tax-qualified advisers – that specialise in dealing with these ‘old’ claims and optimising the tax position for the property investor.
How Much Can I Claim? – Ancillary Costs
Another factor which can often be missed is that the expenditure which is potentially eligible for Capital Allowances can be augmented by related costs.
For instance, the cost of installing an asset can also qualify for Capital Allowances. (The alternative for those installation costs might otherwise simply be to ‘roll up’ as capital expenditure, only to be claimed on disposal of the property). Bearing in mind that electrical mains wiring and plumbing are potentially eligible for Capital Allowances, it’s not hard to see why the ancillary installation costs can significantly boost the value of the overall claim – installation costs can be higher than the underlying materials.
Ancillary costs can include labour and materials expenses to install an item of plant or machinery and even the costs of structural alterations to a building to accommodate the new plant. If professional fees have been paid to architects or structural engineers, then these can also be added, provided they can be shown to relate directly to the installation of eligible plant or machinery.
The rules relating to ancillary costs create something of a ‘quirk’ in the Capital Allowances regime: sometimes from a tax perspective it pays to install eligible plant or machineryafter building a property, rather than as part of the initial build.
For example, a lift is of course eligible for Capital Allowances. A lift shaft is considered by the taxman to be part of the structural fabric of the building and ineligible. But if someone buys a building and then decides to install a new lift, then the cost of the lift shaft becomes ancillary to the installation of plant and machinery, and therefore also qualifies for Capital Allowances.
HM Revenue & Customs’ own Capital Allowances technical manual confirms this (at CA21190; see http://www.hmrc.gov.uk/manuals/camanual/CA21190.htm). Of course, the cost of making such substantial structural alterations is likely to be very high but in some cases a new owner might think it necessary to attract or retain tenants, in which case the additional tax relief should be most welcome.
How Much Can I Claim? – Valuations
One final point to bear in mind when considering a Capital Allowances claim on a purchased building is that actually, the amount of the claim is not necessarily calculated simply by reference to the cost of specific items of plant and machinery, together with related ancillary costs. In fact, provided the selling price has been agreed on an arm’s length basis, it is a “just and reasonable apportionment” of the overall selling price which has been agreed.
It is therefore possible that the amount of Capital Allowances that can be claimed by the buyer is greater than the original cost to the seller. (Although the converse is also true, for instance, if the market is depressed). Caution is needed, though, because if someone has claimed Capital Allowances on those items before, then basically the buyer’s claim cannot exceed the seller’s cost. Nevertheless, this is something to bear in mind – particularly if you’ve bought a property since April 2008 and you may therefore be the first owner eligible to claim for ‘integral features’ such as electrical wiring, lighting, etc.
Capital Allowances can still be claimed now, on properties that were bought many years ago.
The amount which is potentially eligible for tax relief through Capital Allowances can be much higher than just the cost of the item of plant or machinery itself, after factoring in installation and other ancillary expenses.
Particularly when considering a significant claim for a second hand building, it may be a good idea to instruct a surveyor or similar professional with the appropriate qualifications and experience to help you to optimise the tax claim. With a ‘new build’ property, all of the relevant paperwork may be readily available but with older or second hand properties it may be very difficult to gauge the costs of components and installation without substantial expertise.
In the final article, we’ll look at how important elections can be when buying and selling property – and how they can dramatically affect claims. We’ll also look at what can be done with all the additional tax relief arising from Capital Allowances claims.
This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.