Capital allowances can provide significant tax relief for commercial property investors. They enable you to deduct the cost of certain capital expenditure from your taxable profits, reducing your overall tax bill.
  • The types of capital expenditure that may qualify for relief include, but are not limited to, equipment, machinery, and certain fixtures integral to the building.
  • Types of properties that can claim Capital Allowances range from office blocks,holiday homes, bars, restaurants, care homes, banks and everything in between.
  • In short, Capital Allowances are a form of tax relief given in place of depreciation (which is not allowable for tax purposes) on qualifying items of plant and machinery. This extends to many fixtures and fittings in a commercial building.
  • How much can you save? To simplify the rules, let’s say that there were £50,000 of capital allowances identified. If the purchase was in a company structure, you would save £12,500 in Corporation tax. But if this was purchased in your personal name, the saving would increase to £20,000, provided all conditions are met, you are a higher rate tax payer (40%) and subject to certain restrictions.
  • What can be claimed as capital allowances varies from building to building and across industries. These typically consist of things like heating, security, general power, fire alarms, and occasionally even décor times for certain type of businesses! You are correct to believe that you can use capital allowances to offset the cost of purchases, but fewer people are aware that a capital allowance may be available at the time of purchase. In both situations, you might be holding onto a sizable tax write-off.
  • We will carefully survey the property to make sure that all Capital Allowances have been identified and claimed, and we will review and cross-examine all project information (bills, design specifications, bill of quantities, planning documentation, contract sums, etc.) to make sure you receive all available Capital Allowances. This usually leads to a significant increase in the amount of capital allowances that are available.
  • When you buy or sell a property there are several requirements laid out in the Capital Allowances Act all transactions post April 2014 must comply with. Doing this generally requires a Section 198 Election to be entered into by the parties. If this is not done both parties can lose all rights to the Capital Allowances.
  • However, it is crucial to note that capital allowances are not applicable to residential property investments. This is primarily because residential properties are generally not used for a qualifying activity that generates taxable profits. These allowances are designed for expenditure on assets that are used in the business, such as plant and machinery in a commercial property context.
  • If a commercial property is owned by an individual or a partnership and it is used for trading purposes, then it is possible to utilise any trading losses against other income through what’s known as Sideways Loss Relief.
  • Capital allowances can often create a trading loss as they are deducted from the trading profits. This is where Sideways Loss Relief comes into play.
  • Sideways Loss Relief allows you to offset these trading losses against your other income in the same or previous tax year, reducing your overall tax liability. For instance, if you’ve claimed capital allowances on a commercial property which created a trading loss, you could offset this loss against your other taxable income (e.g., employment income or rental income from other properties). And if you are a higher (40%) or an additional (45%) rate taxpayer, your saving is at this rate. While within a limited company your saving would be limited to maximum of 25%.
  • However, there are several restrictions and conditions to be met for this relief, and it can be complex to navigate these rules. For example, there are limits on the amount of income that can be relieved and restrictions relating to ‘non-commercial’ trades or ‘hobby’ businesses.
We emphasise that failing to provide advice regarding Capital Allowances on Fixtures does not reflect poorly on your general accountant. General practice accounting firms refer to us the majority of their capital allowances work on fixtures. With over a century’s worth of case law to be aware of, capital allowances on fixtures is a highly specialised niche area of tax law.
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