Capital Allowances are essentially the tax equivalent of depreciation. Due to the way in which they are calculated, they are not automatically applied to Company Accounts. They need to be identified, assessed and claimed manually.
To help simplify Capital Allowances, we’ve created a handy list of things you should know:
- Anyone who owns a qualifying property is entitled to make a claim under legislation (CAA2001); it’s not a fad or legal loophole
- This form of tax relief has been around since 1878
- According to HMRC, 96% of commercial properties are eligible for Capital Allowances
- As much as £10,000 in tax relief can be recovered for every £100,000 spent on property
- Tax returns for the preceding 2 years can be amended retrospectively to include Capital Allowances
- Capital Allowances can be used against any taxable income – if you own a property, you can use the Capital Allowances against PAYE income tax on a job. The tax refund will be paid through your employer
- Claiming Capital Allowances does not affect your Capital Gains Tax, it won’t reduce the base cost of the property nor its overall value
- Second homes and holiday lets (located within the UK or EEA) are eligible for Capital Allowances. Criteria of the property being available to let for at least 201 days per year and being let for at least 105 days must be met to make a claim. The tax relief will only apply to holiday let businesses
- Capital Allowances can be transferred from one property owner to another if the prior owner is not able to claim. Only tax payers are eligible for Capital Allowances, which excludes Local Authorities, Charities, Pension funds etc.
Why not recommend a Capital Allowance check for your client’s next commercial property purchase? When you want certainty, you need Groundsure.
Arthur Kemp, Managing Director of Exact Business Taxation Services Limited
The Legal Framework
In this short film clip Arthur Kemp, Managing Director of Exact Business Taxation Services Limited discusses the Legal Framework of claiming Capital Allowances on commercial properties.
Capital Allowances are a form of tax relief which has been around since 1878. Capital Allowances can only be claimed once in a property’s lifetime and only if it is deemed a long term fixed asset.
The Finance Act 2012 resulted in a number of changes to Capital Allowances which will affect every commercial property transaction in the UK. Certain agreements between the vendor and property purchaser in order to make a claim and needs to be done within two years of the property transaction
The Law Society Practice Note 2014 states that in commercial property transactions, solicitors need make their clients (whether buyer or seller) aware of Capital Allowance claims so it’s important you have all the information you need.
What are Capital Allowances?
In this short clip, Arthur Kemp, Managing Director of Exact Business Taxation Services Limited introduces Capital Allowances.
Capital Allowances covers a range of different types of tax relief including plant and machinery allowances. Whilst most people think of plant and machinery as items such as farm equipment – on average around 25% of the value of a commercial property is made up of plant and machinery. This can include items such as heating installations, boilers, radiators, lighting and lifts – which can make up a large value in certain properties.
It also includes land remediation relief which are the costs associated with cleaning up contaminated land (there’s 150% available for remediating asbestos and Japanese knotweed).
Capital Allowances are incredibly valuable as by claiming them the owner is effectively increasing the loss rolled forward to future years and elongating the amount of time it takes to pay the tax. It’s incredibly valuable to current owners too as if they decide to sell the property with Capital Allowances; the property has a higher value which could result in getting more for the property.
Who can claim Capital allowances?
In this short film, Arthur Kemp, Managing Director of Exact Business Taxation Services Limited outlines the eligibility for Capital Allowances.
Capital Allowances are not available to claim on all properties, the criteria for eligibility are broken into two main areas commercial and residential properties. All commercial properties qualify for Capital Allowances; however, an eligible property won’t always mean a claim can be made. Organisations that are outside the scope of tax will not be able to claim, for example, charities, local authorities and pension funds. That being said – if the organisation were to sell the property they could potentially demand a higher price if Capital Allowances were available.
The Capital Allowance Act states that dwelling houses are not eligible to make a claim which rules out the majority of residential properties, however, there is no definition of what a dwelling house is – so there is a chance that Capital Allowances could be claimed on certain residential properties – for example in a block of flats there will be communal access areas, Capital Allowances could potentially be claimed on these but not the individual flats within the property.