Capital Allowances

Understanding property-related taxation can often feel like untangling a complex financial puzzle. However, amidst all these intricacies, there is a clever way to save on your property taxes: capital allowances. These allowances can be a valuable resource when it comes to responsibly managing your financial obligations. They present numerous opportunities for significant tax savings, which can sometimes go unnoticed. Let’s demystify this hidden gem and explore how capital allowances may benefit your property finances, ensuring that your hard-earned money stays right where it belongs—in your pocket.

Capital Allowances

What Are Capital Allowances?

Let’s start with the definition of capital allowances. In the simplest terms, these are a form of tax relief for property owners and are available in respect of qualifying capital expenditure related to the utilisation of assets for the operations of a trade or rental business.

They allow you to deduct the value of certain capital expenditures from your taxable profit as a business or property owner. This might include spending on certain assets that you keep to use in your business premises, like equipment, machinery, or business vehicles, as well as certain types of building expenditures. 

These allowances are a legal and incredibly effective way to save on your tax bill, making your property investments more profitable and financially manageable. The key is to understand how to navigate and take full advantage of these deductions, aligning with the correct categories and criteria to maximise your savings.

What Are Capital Allowances?

Who is Eligible to Claim Capital Allowance In the UK?

In the UK, anyone, whether an individual or a business, can benefit from capital allowances when making a capital investment. This applies to various entities like sole traders, partnerships, limited companies, landlords, and property investors. Whether you run a small business or manage a property portfolio, these allowances can work in your favor. Just remember, the capital expenditure should be on the list of qualifying items such as equipment, machinery, and business vehicles. If you lease property to a tenant, you may also be eligible to claim capital allowances on the fixtures within that property. 

Types of Capital Allowances

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is a fantastic opportunity for businesses to save costs. With the AIA, you can claim up to £1 million on qualifying plant and machinery, like tools, equipment, or vehicles. This means you can reduce your taxable income and lower your tax bill. It’s important to remember that not all assets qualify for the AIA, so it’s a good idea to understand the criteria or consult a tax professional for guidance. If you time your purchases to align with your accounting period, you can make the most of your AIA claim, giving your business or property venture a financial boost.

First Year Allowances (FYA)

Businesses can benefit from First Year Allowances (FYA) or enhanced capital allowances for certain types of expenditure. This means you can claim the full amount for certain assets purchased in the same financial year of purchase. It’s like getting the entire cost of qualifying assets deducted from your profits before tax, resulting in significant savings. One example of qualifying expenditure is electric car charging points, which not only contribute to a greener environment but also offer attractive financial benefits for businesses. Keep in mind that starting from 1 April 2023, Full Expensing (FE) has replaced the super-deduction incentive. This provides another opportunity for businesses to maximize savings on qualifying capital expenditure. 

Full Expensing (FE)

Full Expensing (FE) is a substantial boon for companies looking to maximise their tax relief on capital expenditure. Since its introduction on 1 April 2023, it has offered companies the ability to significantly enhance their capital allowances claims. FE is available exclusively on new main or general pool expenditures. It operates on similar principles as the Annual Investment Allowance, but with an enticing difference – there is no upper limit. That means there’s no cap on the capital expenditure you’re entitled to write off against your taxable income under this scheme. It’s an incredibly powerful tool for businesses that are investing heavily in eligible assets, unlocking the potential for unprecedented tax savings.

Special Rate (SR) First-Year Allowance

Introduced on 1 April 2021, the Special Rate (SR) First Year Allowance provides a substantial opportunity for a tax deduction on new integral features and SR pool expenditure. A company may claim capital allowances and write off 50% of the cost of these qualifying items against your taxable income in the year of purchase. This means you can deduct half the cost of these items from your profits before tax in the first year, offering a significant reduction in your tax bill. The remaining 50% is not lost but claimed as WDAs, ensuring you enjoy the full tax deduction over time. This form of allowance can be particularly beneficial for businesses making significant investments in SR items and integral features, providing an additional avenue for enhancing savings on your tax liabilities. 

Writing Down Allowances (WDA)

Should your capital expenditure surpass the Annual Investment Allowance (AIA) limits, or be a historic expenditure, resorting to WDAs could be a judicious route. WDAs allow businesses to deduct a percentage of the asset cost from their annual profits. However, the percentage deduction is not uniform – it is contingent on the type of asset, which must be categorised into appropriate pools. The allocation into pools is critical because it determines the rate at which the writing down allowances can be claimed. The “Main rate pool” involves most plant and machinery and allows for an 18% yearly reduction on a reducing balance basis. On the other hand, “Special rate pool’ includes long-life assets, integral features of a building, or cars with high CO2 emissions, which permit a 6% reduction on a reducing balance basis. 

Super Deduction

The Super Deduction presents an extraordinary opportunity for companies to maximise their tax savings on certain items of plant and machinery. This incentive, operational between 1 April 2021 and 31 March 2023, offers a staggering first-year capital allowance of up to 130% on qualifying expenditure. This means that for every pound your company invests in eligible assets, you can subtract up to £1.30 from your taxable income in the first year, thereby substantially reducing your tax liability. This generous provision underlines the government’s commitment to stimulating business investment in the post-pandemic recovery phase. 

Super Deduction

Capital Allowances on Property

When it comes to property investments, understanding and maximising your capital allowances can lead to substantial tax benefits. Whether you’re a commercial property owner, a landlord, or an investor, these allowances can considerably reduce your taxable income, and therefore your tax bill. 

In the following section, we will delve into the specifics of how these allowances apply to property, helping you to appreciate their potential impact on your financial bottom line.

Capital Allowances within Commercial Property

Commercial properties offer various opportunities to claim capital allowances, which can result in significant tax benefits. Two notable categories are Plant and Machinery Allowances and Integral Features Allowances.

Capital allowances for plant and machinery allowances, currently set at an annual rate of 18%, cover a wide range of items and capital assets in commercial properties, going beyond what you might typically consider as ‘machinery’. The potential for claiming under this allowances is extensive, highlighting the importance of fully understanding its scope.

Introduced in April 2008, the Integral Features Allowances can be claimed at a rate of 8% per year. This allowances encompasses essential elements of a building’s functionality, including electrical systems, cold water systems, lifts, and air conditioning, among other features commonly found in commercial buildings.

Capital Allowances within Residential Property

Residential properties also have the potential for capital allowances, although the conditions are stricter compared to commercial properties. It’s the Furnished Holiday Lettings (FHLs) that qualify. FHLs are a specific type of furnished residential property that’s available for holiday letting for at least 210 days and let for at least 105 days in a year. For these properties, you can claim Plant and Machinery Allowances, just like commercial properties, for assets used for the business, such as furniture, appliances, and kitchenware. Additionally, you can also claim Integral Features Allowances for certain components essential to the property’s functionality, like heating systems or security systems.

Capital Allowances within Rental Property

Rental properties offer opportunities to make a claim for capital allowances, providing savvy landlords with a feasible avenue to mitigate their tax liabilities. Primarily, these allowances can be claimed on the ‘movable’ fixtures and fittings within a rental property, such as furniture in furnished rentals, and appliances like washing machines and ovens. 

The current rate for these allowances on rental properties is particularly beneficial, standing at 12.5% of the cost per year, for a maximum of eight years. This not only includes furniture that you have purchased for your property but extends to the acquisition of white goods as well.

Capital Allowances within Investment Property

Investment properties offer another significant opportunity to apply capital allowances, potentially saving investors a substantial amount in tax liabilities. Just like with rental properties, you can make a claim for capital allowances on the costs of purchasing, constructing, or improving commercial properties. This includes allowances for various items like heating systems, air conditioning units, escalators, radiators, and more. 

What’s interesting is that you can even make a claim for items that were included in the property at the time of purchase, even if it was in the past. Additionally, you can make a claim for capital allowances for demolishing a building or clearing the land before construction work begins. It’s a fascinating way to maximise your tax benefits while investing in properties.

Capital Allowances within Plant and Machinery

This allowances covers a wide range of assets that you may own or use for your business. Think office equipment, trucks, tools, machinery, and even cars and vans. The rules regarding allowances for plant and machinery can be complex, and if not fully understood, you might miss out on potential tax benefits. So, it’s crucial to grasp what falls under the umbrella of “plant and machinery” for this allowances.

In simple terms, plant and machinery include any assets you use in your business that aren’t part of the premises themselves. This can range from factory machines, computer equipment, and servers to office furniture, partitions, and even large commercial vehicles. It’s worth noting that certain alterations to existing buildings made to install plant or machinery can also qualify for this allowances.

Under this category, there are two types of allowances: the Annual Investment Allowances (AIA) and the Written Down Allowances (WDA). The AIA allows you to subtract the full value of a qualifying item from your profits before tax, while the WDA allows you to subtract a percentage of the item’s value each year. The specifics of how much your company can claim and the conditions for making these claims can be complex and may vary depending on the nature of the assets and your business.

Our Approach to Claiming Capital Allowances

At Elect, we understand the importance of making accurate claims for capital allowances. We take a meticulous and knowledgeable approach to ensure that our clients receive the financial benefits they deserve. We carry out a detailed analysis of the total capital expenditure incurred to identify the maximum amount of qualifying expenditure.  Moreover, we provide invaluable support to accountants and lawyers, helping them fulfill their obligations to their clients.

The process of claiming capital allowances can be risky, especially with the legislative changes introduced by HMRC in the Finance Act of 2012. However, our expertise in tax legislation, HMRC practices, and surveying, coupled with our attention to detail and use of technology, allows us to prepare thorough and well-researched claims. This not only gives our clients peace of mind but also enables them to receive timely tax refunds, saving their valuable resources.

Our Approach to Claiming Capital Allowances
Why Choose Elect CA as Your Capital Allowance Tax Relief Specialists

Why Choose Elect as Your Capital Allowances Tax Relief Specialists

When you choose Elect CA as your Capital Allowance Tax Relief Specialist, you’re opening the door to a world of expertly handled and stress-free tax relief solutions. Our dedicated capital allowances team has extensive experience in capital allowances and is ready to tackle any challenges head-on.

We take pride in providing personalised service to each client and ensuring compliance with HMRC regulations. Not only do we specialise in understanding intricate tax laws, but we also excel in property-related expenses.

With our state-of-the-art technology, including our bespoke Apple-based app, we leave no stone unturned in identifying potential areas for tax relief. And in the rare event that HMRC challenges any aspect of our report, we’ll stand by your side to defend your claim. Rest assured, we’ve never lost a claim.

Capital Allowances Restrictions

There are certain restrictions imposed on capital allowances that you should be aware of to optimise your claims. For instance, not all business expenditure qualifies for capital allowances. There are specific rules and exclusions.

One key restriction to bear in mind is that capital allowances cannot be claimed on leasehold buildings where the lease is for less than 25 years. Capital allowances are also not available for items used for business entertainment purposes, such as a yacht or a karaoke machine.

Relief for some items is given in other ways. For example, the costs of buildings, including the costs of constructing them, are generally not eligible for capital allowances. Instead, you may be able to claim relief on the interest portion of your finance costs.

Another restriction relates to cars. From April 2021, the super-deduction and 50% first-year allowance won’t be available for cars. Cars will continue to be treated under the existing first-year allowances for low-emission cars and the main rate or special rate pools.

In addition, restriction rules apply to furnished holiday lettings. While these are treated as a trade for some tax purposes, capital allowances are only available for Housesof Multiple Occupancy (HMO’s), “and other qualifying equipment in the communal areas but not for those used in the let property.

The process of claiming capital allowances can be complex, especially with the legislative changes introduced by HMRC in the Finance Act of 2012. However, our expertise in tax legislation, HMRC practices, and surveying, coupled with our attention to detail and use of technology, allows us to prepare thorough and well-researched claims. This not only gives our clients peace of mind but also enables them to receive timely tax refunds, saving their valuable resources.

Capital Allowance Restrictions

Capital Allowances Documents

In this section, we delve into the importance and the specific documents you will need to effectively manage and make claims for your capital allowances.

Help Sheet

A help sheet is an essential tool in your arsenal when it comes to capital allowances. This invaluable document can guide you through the intricate maze of tax laws and rules, providing clear, concise information on different aspects of capital allowances. The help sheet assists in identifying what qualifies as a capital allowance, the different types of allowances, how and when to claim them, and how they interact with other elements of your tax returns.

A comprehensive help sheet should include the following components:

  • An overview of capital allowances and their relevance to your business.
  • A detailed breakdown of the different types of capital allowances: AIA, WDA, etc., and the specific items that qualify for each.
  • Guidelines on how to calculate capital allowances and how to claim them in your tax returns.
  • Information on the restrictions and exclusions related to capital allowances.
  • Case studies to help illustrate real-life applications and scenarios.
  • A Frequently Asked Questions (FAQs) section to address common queries and misconceptions.
  • Contact details for further help and support.

Qualifying Questionnaire

The Qualifying Questionnaire is a critical document that helps streamline the process of capital allowances. This document is designed to ascertain the eligibility for capital allowance claims, providing a clear analysis of your property and business expenditures.

The Qualifying Questionnaire typically includes a series of questions aiming to understand your business’ nature, the types of properties you own, the costs you have incurred in the purchase or improvement of your properties, and your current tax situation. The responses to these questions will help our specialist capital allowances team at Elect CA to determine the possible claimable capital allowances for your business. 

This questionnaire serves as an initial assessment tool, ensuring that we don’t overlook any potential claims, thereby maximising your tax savings. Following the completion of the questionnaire, our team will review the responses, and, if needed, organise a survey of your property to further analyse and identify any hidden assets that could qualify for capital allowances.

Help Sheet

FAQs

How are Capital Allowances calculated?

Capital allowance is calculated based on the type of asset and the rate of allowance applicable to it. For instance, for plant and machinery, you may claim an Annual Investment Allowance (AIA) which is currently set at a rate of 100% up to the first £1 million of expenditure (for the tax year 2021-2022). This means you can deduct the full value of the item from your profits before tax within this limit. Any expenditure beyond this limit can be put into a pool, where a WDA can be claimed. The WDA is a percentage of the balance of the pool, which is typically either 18% or 6%, depending on the type of asset. For certain energy or water-efficient equipment, a 100% first-year allowance (FYA) can be claimed.

Is there a maximum limit in the value of Capital Allowances?

The maximum capital allowance claimable is dependent on several factors including the type of asset and the specific allowance scheme applicable. For instance, under the Annual Investment Allowance (AIA) scheme, the current maximum limit is £1 million for the 2021-2022 tax year. This limit is set for the total expenditure on almost all plants and machinery (not cars). For expenditures beyond this limit, the WDA applies which is either 18% or 6% depending on the type of asset. Note that there are different schemes such as the super-deduction and Special Rate Pool with their own rules and limits.

Can I claim capital allowances on furniture?

Yes, you can claim capital allowances on furniture, however, the specific allowance will depend on the type of furniture and its use within the business. For example, if the furniture is being used in the day-to-day operations of the business (such as desks, chairs, etc.), then they are usually treated as plant and machinery and can be claimed under the Annual Investment Allowance (AIA). It allows a 100% deduction from your profits for the cost of the furniture up to the AIA limit (£1 million for the tax year 2021-2022).