In their simplest form, capital allowances are tax relief for loss in the value of assets due to depreciation. These assets would usually comprise items for use in the business whereby they are subject to ‘wear and tear’. In a normal trade, or commercial property letting, this equipment would collectively be defined as ‘plant and machinery’ (‘plant and fixtures’ specific to property) and accordingly include manufacturing machines, power tools, vehicles, fixtures and fittings and suchlike. Also, in a standard trade, or commercial property letting, capital allowances can be claimed for the cost of improving an asset, or taking it to higher spec.
One common failing and associated potential loss of allowance concerning commercial property letting is that the buildings normally include 'plant' such as heating, ventilation and cooling equipment, specialist and emergency lighting, alarm and security systems plus 'fittings', including toilets, sinks, general sanitary ware, etc. Often these items are not separated in the accounts from the overall expense of the building itself and have accordingly not had capital allowances claimed. Being that the rule is that capital allowances can be claimed at the full purchase value, at any point, providing that they are still in the 'ownership' of the Landlord, applicable recovery can potentially be made going back many years. Expert advice is therefore required in recovering, or initiating, the applicable capital allowance.
In a residential property letting business, other than ‘FHL' (see below), the treatment is different, whereby relief on capital items is limited to certain categories and principally classified as ‘Domestic Items Allowance’. This allowance came into being in the 2016/17 tax year, replacing ‘Wear and Tear Allowance’ which represented a flat 10% of gross rent allowance for furnished lettings in order to cater for depreciation. Domestic Items Allowance is, however, available for both furnished and unfurnished lettings. Improvements to the principal asset, being the building itself and fixtures and fittings are not relievable by capital allowances concerning residential lettings (other than FHL) and, where applicable, this would normally be retained expenditure in order to offset a potential capital gains calculation on disposal of the property, although there are some specified improvements that can be treated as a repair expense, such as entire replacement of windows with double glazed units.
In standard trades and commercial letting the way capital allowances are claimed depends on the accounting method used. When the ‘Accruals’ method is used, capital allowances are detailed and claimed separately from expenses using, principally, either of two forms of claim, one being AIA (Annual Investment Allowance), whereby investments (other than in cars) made in the tax year can be claimed in ‘one hit’ up to the point of maximum efficiency, with the balance (which can be part utilised and/or carried forward) being subject to an 18% writing down allowance which reduces the claim over ensuing years until the asset is ‘written off'. The option to use the 18% writing down allowance, rather than AIA, is available on all assets if more efficient and, indeed, it must be used where the asset hasn’t been purchased in the applicable tax year. Also, cars have to use the 18% writing down allowance, although vans and speciality cars, such as cars fitted with dual controls, can utilise AIA. There are other forms of capital allowance available, however, are not generally relevant for the purposes of this article.
The ‘Cash Basis’ method of accounting enables assets used in the course of the business, other than cars, to be claimed along with expenses and, being that this is the default method for the vast majority of Landlords, is the principal route for the claim, although the distinction for residential lettings is that most capital items have their own box on the property pages of the tax return into which they are categorised as ‘Domestic Items Allowance’. Other asset claims for ‘plant and machinery’ can be made via general expenses, as per commercial lettings and such items might include a lawnmower, or other garden machinery to be used exclusively for a residential property letting business (usually applicable to multiple properties). Capital allowances can also be claimed for cars used in the property business at the 18% writing down rate, which is detailed on the tax return external to expenses, however, Landlords would normally take advantage of the simplified method of claiming vehicle expenses at fixed rate mileage and this includes an allowance for vehicle depreciation (see section below).
This is the principal route in claiming allowances for the bulk of assets purchased in the course of a residential property letting business. It is important to note that the allowance is only available on replacement of items and therefore cannot be utilised for the initial investment in new items when setting up the letting, or providing an additional facility for an existing tenant. Additionally, the replacement has to be ‘like for like’ and not an upgrade in facility for the full amount of purchase to be claimed. However, just because the item is new, it is not generally considered an upgrade, it is more to do with the facility provided by the replacement i.e. replacement with ‘luxury’ spec. when the original had been ‘standard’. Where the new item is not substantially of the same standard/quality as the old item, the allowable amount is equal to the lesser of:
or
If an old item is part exchanged for a new item, the allowable amount is the excess over the trade in value of the old item.
For the vast majority of residential Landlords the allowable amount is the purchase price (or as deemed) including VAT and, only when the Landlord is VAT registered is when the VAT component can’t be claimed.
HMRC’s description of items that can be included for ‘Domestic Items Allowance’ are as follows:
The above list is not intended to be complete but gives an idea of the assets that are 'domestic items' and would qualify for relief.
Fixtures do not qualify for Domestic Items Allowance and are generalised by HMRC in description as:
Examples of fixtures:
This above list is not intended to be complete but gives an idea of the assets that are deemed as fixtures and would not qualify for Domestic Items Allowance.
As these items are fixtures of the building, the cost of replacing these may be an allowable expense as a ‘repair’ to the building. However, expenditure will not be on repairs if an ‘entirety’ is replaced i.e. if a component of a kitchen, for instance, precipitates the replacement of the whole kitchen. Such an expense would normally be classified as capital expenditure to be utilised in offsetting a potential capital gains liability if the property is ever sold.
Domestic Items Allowance cannot be claimed as component of the ‘Rent a Room’ scheme, or if the dwelling is in all, or part, a furnished holiday letting (FHL).
Travel costs incurred incurred in the course of a UK letting business are generally allowable (other than International travel that includes any element of private use), however, what about the depreciation when a Landlord’s own vehicle is used?
Capital allowance for vehicle depreciation is principally catered for in the simplified mileage claim, whereby the mileage of return trips to and from the let property are ‘clocked’ and then added up for the tax year using the specified rates to form an expense claim. These rates are calculated to include the depreciation (loss of value by virtue ‘wear and tear’) on a vehicle caused by driving it any distance. This depreciation is reflected in the re-sale value of the vehicle whereby the miles on the clock at the point of sale are an important factor i.e. a higher recorded mileage will generally mean a lower disposal price for the same vehicle.
The available mileage rates for cars and vans are currently:
Simplified mileage rates cannot be used if you have separately claimed capital allowances for a particular vehicle, whether used in the property letting, or other business and, equally, once simplified rates are claimed, a separate capital allowances claim can’t be made on the same vehicle. While there is a mechanism to claim capital allowances separately for a vehicle in a property letting business, subject to private use apportionment, the simplified method is exactly as described and can actually be more tax efficient, subject to certain factors.
A house in multiple occupation is, essentially, where 3 or more tenants reside within the building forming more than one ‘household’ and toilet, bathroom or kitchen facilities are shared between them. A household is either a single person or members of the same family who live together and a family includes people who are married or living together (including people in same-sex relationships), relatives or half-relatives (for example grandparents, aunts, uncles, siblings), step-parents and step-children.
From the point of view of capital allowances, for each dwelling comprising of the ‘core’ private and unshared living area for each tenant, the standard residential rules apply, however, an issue arises in the ‘common’ (shared) areas within the building, whereby some Landlords have considered that a claim for ‘plant and fixtures’ might apply, as they would in a commercial building (shop, factory, warehouse, etc.). A Court case concerning HMO has, however, deemed that capital allowances are not available on plant and fixtures within communal areas such as kitchens, living rooms and bathrooms, as these still fall within the definition of a dwelling house, however, it also confirmed that in the right circumstances, capital allowances should be available on fixtures within common areas such as hallways, lifts and corridors.
Accordingly, Landlords of HMO should seek specialist advice on this subject, if it becomes applicable.
It is important to note that the regime of FHL with it’s specialised (and beneficial) taxation treatment is due to change and current Government plans are to abolish the regime from 6 April 2025. When carried out, the treatment of capital allowances will revert to that applied to standard dwellings as detailed in the earlier paragraphs of this article.
In the meantime, as FHL are currently treated by HMRC as a ’trade’ for the purposes of capital allowances and, although they are 'residential' in nature, claims can be made for ‘plant and fixtures’ and improvements to the building, as per commercial lettings. This means that, in the circumstances of a profitable letting, instant tax relief can be obtained by virtue of a claim in the manner as described for commercial lettings in the earlier parts of this article.
Clearly the issue of determining what can be claimed (and when), what qualifies for Domestic Items Allowance, what qualifies as a repair, or otherwise as capital expenditure and then such determination to be applied at maximum efficiency, requires expert attention. The solution is to use Taxeezy, who will not only provide the ultimate in long-term Landlord taxation experience (whether UK resident or non-resident), however, do so at very reasonable cost. Given a specific scenario, either in the preparation of a tax return application, or advice via the ’Taxeezy Doctor’ service, Taxeezy can provide substantial tax savings by the application of expertise, coupled with instant peace of mind for the client.
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