Who can claim?
Any commercial property owner. A sole trader, a partnership, a Limited Company – basically any legal tax paying entity that owns a commercial property. It’s your legal right to claim rather than a privilege!
All the features and items installed within a commercial property which make it fit for the purpose of its trade. In properties such as nursing homes, qualifying items include carpets, beds, kitchens, wardrobes, security alarms, lifts and hot and cold water installations. Unusual items such as dado mobility rails, specialist sluice and sanitary equipment, specialist dementia equipment and safety equipment can also qualify.
When are capital allowances available?
Capital allowances are available when a commercial property is:
- fitted out
- refurbished, or
Even if these events happened a number of years ago, it may still be possible to go back and revisit the potential for a capital allowances claim.
How are capital allowances offset?
In two ways:
Firstly, capital allowances can be offset against investment income - for example, a commercial property investor who receives rental income;
Secondly, a trader such as retailer can use capital allowances to reduce trading profits.
It’s important to note that a property trader (a developer) is not entitled to claim capital allowances as the asset is held as trading stock. This means any expenditure on the property would be classed as trading expenditure, and as a result, would preclude it from being claimed as capital allowances.
Capital Allowances: Rules of Thumb
Acquisitions, disposals & construction projects
|Property Type||Acquisition/ disposal qualifying %||New build/ refurbishment qualifying %|
|Office||15 – 30%||15 – 45%|
|Office refurb/ fit Out||40 – 100%|
|Retail||2 – 25%||5 – 40%|
|Retail refurb/ fit out||40 – 90%|
|Industrial||2 – 20%||5 – 25%|
|Hotel||15 – 45%||15 – 50%|
|Hotel refurb/ fit out||40 – 80%|
|Furnished holiday let||15 – 25%||15 – 30%|
What about overage?
In April 2008 additional qualifying features were added to the capital allowances pot. These items are known as integral features. The introduction of these additional items provided further value and scope to capital allowances claims. For example, if a seller purchased a commercial property prior to April 2008, and then sold the property today, the purchaser has an overage claim representing the integral features which the seller was never entitled to, prior to April 2008.
Integral features qualifying since 2008 include:
- An electrical system, including a heating or lighting system
- Cold water systems
- External solar shading
- Thermal insulation
Any business which acquired or developed property prior to April 2008 would not have been able to claim allowances on the items list above.
Overage Claims: Rules of thumb
|Property type||Integral features Qualifying %|
|Office||5 - 10%|
|Retail||2 – 10%|
|Industrial||2 – 10%|
|Hotel||5 – 10%|
What are the timescales?
A claim for capital allowances must be made within a company’s tax return by the statutory filing date (12 months from the end of the accounting period) or in an amended tax return (12 months from the anniversary of the statutory filing date). This effectively gives you two years from the end of the accounting period to file a capital allowances claim. The time limit is extended if an enquiry is raised by HMRC into the relevant tax return.
So, when should you claim?
It is a common misconception that capital allowances on qualifying expenditure are lost if they are not claimed in the tax return when the expenditure is originally incurred. However, this is contrary to what the legislation allows.
In fact, a claim can be made within any open tax return provided the qualifying asset is in existence and in use for a qualifying activity. For example, if a business has qualifying expenditure the year ending 31st December 2012, it would still be ok to claim capital allowances on this expenditure in the 31st December 2017 providing the asset is still in existence.
Purchasing – post April 2014
The rules for claiming capital allowances on second hand fixtures changed in 2014. The tax issue must now be dealt with at pre-contract stage (before legal exchange of contracts!) to avoid blindly destroying the capital allowances value embedded within the building.
From April 2014, the buyer must satisfy the pooling requirement. No claim by the seller means no capital allowances for the buyer! If the seller has not claimed capital allowances, the seller must undertake a full claim within a stipulated time frame and then pass the full capital allowances value via a s.198 election. This will necessitate a correctly drafted warranty within the sale and purchase contract. Let YesTax draft this for you!
To understand the seller’s capital allowances position at the time of the legal transaction, the following documents must to be reviewed:
- Sale & purchase contract
- CPSE replies to enquiries
- s198 election
We can then assess the opportunity.
If the seller has not made a comprehensive claim, the purchaser could lose out because they will be unable to inherit anything the seller should have claimed but didn’t. The purchaser could also lose out if the s.198 election is for a small amount. Both points need addressing.
I am considering a capital allowances claim. Will this impact the capital gains calculations when I dispose of the property?
No! There is a common misconception that any savings achieved by claiming capital allowances will be cancelled out later by an increased chargeable gain. This is not true. It is not necessary to deduct any capital allowances from the cost of an asset for capital gains purposes, so it is not possible for a capital allowances claim to create or increase a chargeable gain. Furthermore, claiming capital allowances also has no effect on the calculation of any capital gains indexation allowance that may be claimed.
What are RDAs?
As outlined here R&D tax relief is available on revenue expenditure rather than capital expenditure. However, a rarely claimed capital allowance pool for expenditure incurred on R&D related capital expenditure exists. Known as the Research and Development Allowance (RDA), the pool gives an uncapped 100% first year allowance.
What expenditure qualifies for RDAs?
A company may have an RDA claim if it has:
- built or refurbished R&D facilities. Better still, if the R&D related assets account for at least 75% of the overall cost of the facility, RDAs can apply to the entire cost of the facility. For example, if the development of the research laboratories on the ground floor costs £850,000 and the top floor general office space was £150,000, then the total £1m expenditure would qualify RDAs.
- invested in plant, machinery, fixtures, or fittings to support R&D activities.
- Incurred expenditure on providing facilities or assets used by employees carrying on research and development. For example, if the company provides a car for their employee which is used to travel between research sites to check the research work being carried out, cost of the car is expenditure on research and development and is qualifying for RDAs.
What are ECAs?
ECAs are Enhanced Capital Allowances. Through the taxation system, the UK Government actively encourages businesses to be more energy efficient. If items of plant or machinery meet the Carbon Trust’s energy efficiency criteria, the full cost of these items can be written off in the first year providing 100% tax relief. The alternative would be (in most cases) tax relief at only 8% per annum on a reducing balance basis.
So you can’t claim on residential property, but can you claim for Houses with Multiple Occupancy (HMOs)?
In certain circumstances you can.
The first point to note is that capital allowances are not available for plant and machinery in domestic dwelling houses. There has been much discussion as to what a dwelling is, but HMRC is of the view that it provides the facilities required for day-to-day private domestic existence.
HMRC states in its briefing note that student accommodation such as a HMO which includes individual bedrooms and communal kitchens are domestic dwellings, with no capital allowances available.
It is possible to compare this to common, non-domestic dwelling areas (such as entrance halls or lifts) which serve a number of flats. In this instance, the plant and machinery in the common areas may be eligible for capital allowances. Capital allowances may also be available for university residences where, for example, the kitchen and dining facilities are physically separate from the study-bedrooms and may not always be accessible to the students. This would be regarded an institution rather than a dwelling house. In respect of the areas of a HMO that may attract the relief, this will be restricted to shared corridors, halls and lifts. These areas are likely to be finished to a more basic standard than other areas and although that may equate to 10-15% of the areas of the accommodation, these areas will not result in 10-15% of the value for capital allowances purposes. A more realistic figure is likely to be a maximum of 5%.
Can I claim capital allowances on a furnished holiday letting?
Yes! Capital allowances can be claimed on items such as chairs, beds, cupboards, TVs and lamps. These are obvious moveable items that are usually claimed. What is not always appreciated is the ability to claim capital allowances on the “integral features” which would include items such as the heating, electrics and plumbing.
As a rule of thumb, these integral features can often amount to between 10% and 30% of a property when purchased. This percentage will be at the upper range when there are items such as air conditioning and a swimming pool.
How do I know my property qualifies as a furnished holiday letting?
It must be;
- situated in either the UK or Europe
- it must be furnished
- it must be commercially let with an intention to make a profit
- it must be available for letting for at least 210 days a year
- it must be let to the public for at least 105 days in the year.
The rules are complex and it is not possible to count days the property is let to friends or relatives at zero or a reduced rate. It is also not possible to count longer-term lets of more than 31 days, unless the 31 days is exceeded because of unforeseen circumstances.
Is it possible to still claim capital allowances on my furnished holiday letting if the letting conditions are not met?
Yes, in certain circumstances! If the property is not let for 105 days, there are 2 further options that can help you reach the occupancy threshold; the averaging election and the period of grace election.