Capital Allowance FAQs
What are Capital Allowances?
Capital Allowances are a form of tax relief for capital expenditure. Depreciation of fixed assets is a non-allowable expense and consequently is not deducted from income when calculating taxable profits.
Capital allowances seek to save the taxpayer money by reducing taxable profits (NOT cash flow). This is because instead of depreciation, Capital Allowances are given for expenditure on some capital assets as a tax allowable expense.
Why are Capital Allowances not automatically claimed by accountants or other tax agents?
Unfortunately, claiming Capital Allowances requires specialist knowledge which is usually outside the remit of most agents and accountants.
As an example, to successfully maximise a claim for capital allowances requires the identification of the qualifying and non-qualifying expenditure, and a detailed knowledge of the act and relevant case law. Often it also requires surveying skills to separate out costs or break them down.
Can Capital Allowances be claimed on existing commercial properties?
Yes they can using HMRC’s Section 562 Apportionment formula.
It is typical to see 25%-40% of the purchase price back in Capital Allowances.
Can Capital Allowances be claimed on the refurbishment of an office?
Yes they can.
Capital Allowances may be claimed on the refurbishment of almost any commercial property, with the amount that may be claimed varying from project to project.
What attracts Capital Allowances within a commercial property?
Items within a commercial property that attract Capital Allowances are known as “plant & machinery” under the CAA2001, Section 23, List C.
Items include heating and ventilation installations, lighting and general power systems, fire and security alarms, data and telecoms systems, carpets, ironmongery, lifts, incoming mains (water, gas, electric) right through to kitchen cabinets, toilets and everything in-between.
Can I claim Capital Allowances on my BTL property?
Unfortunately you cannot.
Capital Allowances are unable to be claimed on residential properties. Legislation prevents landlords claiming Capital Allowances within a dwelling house. This includes student lets and cluster flats.
I am a property developer, can I claim Capital Allowances?
Unfortunately you cannot.
In order to claim Capital Allowances you need to hold the asset as an investment. Property developers hold the property as stock in trade meaning no claim can be made.
Does my apartment complex hold Capital Allowances?
Yes it does.
Unlike houses an apartment complex will have embedded Capital Allowances within the communal areas of the building. This means reception areas, hallways stairwells, and lifts may claim which typically results in 10% of the purchase price being claimed as Capital Allowances.
I purchased my commercial property within a pension fund, can I claim?
Unfortunately you cannot.
Pension funds, property developers, charities and local authorities do not qualify to claim Capital Allowances as they are not subject to applicable tax.
Can I get a tax refund by completing a Capital Allowances exercise?
If you have owned your commercial property for two years or more, and pay tax then you may be able to claim.
As standard, a tax return can be amended up to 12 months after its filing deadline and the figure of Capital Allowances we identify can be input into the tax return to generate a tax refund.
Will this affect Capital Gains Tax?
Claiming Capital Allowances does not affect Capital Gains Tax as it’s not a deduction or addition to property value.
How much time will my accountant need to put in assisting CPT in claiming Capital Allowances?
At most the accountant will be required to send us financial information for the basis of the claim paired with re-submission of the past two tax returns. In total no more than 1 hour of their time will utilised.
I haven’t paid tax and won’t for a few years.
In this case Capital Allowances will likely not be a viable option. However if you purchased/refurbished your property within the last 18 months the AIA will be missed if no steps are taken. The AIA will add to any losses currently accrued.
My tenants have spent a lot on fixtures and fittings.
Tenants fixtures are usually loose chattels in which case this would have a minimal impact on a Capital Allowance claim.
What are Capital Allowances worth to me?
The exact worth of Capital Allowances for you is difficult to establish since it is different depending on the profitability of the business, the future actions of the taxpayer, as well as the type of qualifying expenditure incurred.
Capital Allowances save you money through tax saving, therefore there must be tax to save for the Capital Allowances to be worth anything.
For businesses which are temporarily without a tax liability however, there may still be a benefit to claiming Capital Allowances. Even where Capital Allowances cannot be fully utilised by you because of insufficient profits, they may be of value to a future owner of the asset and of course, this value may be realised in the sale price.
It is worth noting that while Capital Allowances provide tax savings, there is the possibility that the tax relief is clawed back when the taxpayer sells the asset that originally generated the saving. For many types of assets though, particularly plant and machinery, claw-back can be avoided by taking certain actions.
What are Capital Allowances worth?
The value of Capital Allowances is not always easy to establish. It can be affected by the businesses profitability or the tax rate of an individual.
The capital allowances you identify is not what you get back as a tax saving – you must take your tax rate into account.
It is helpful to remember 3 rules:
- Rule 1: Capital Allowances save tax, so there must be tax to save.
- Rule 2: Capital Allowances cannot be claimed by non-taxpayers, such as pension funds.
- Rule 3: Capital Allowances are valuable to a business that temporarily has no tax liability. Even if you cannot use the Capital Allowances now (because of insufficient profits maybe), they may be of value later or to someone who owns the asset in the future.
Do you have to give Allowances back?
Capital Allowances provide tax savings, but if you sell an asset that you had an Allowance for there is a chance that relief can be ‘clawed back’. For plant and machinery fixtures action can be taken to avoid or limit claw back. For some other assets, claw-back will only take place within a certain time limit.
Different types of qualifying expenditure attract annual allowances at different rates. In the case of expenditure on renovating business premises (BPRAs), and research and development (RDAs) the qualifying expenditure is 100% allowed in the year of expenditure.