Capital allowances can be an extremely valuable form of tax relief, allowing owners of commercial property in particular to claim qualifying items of capital expenditure as a tax deduction.
Understanding how capital allowances work will be key to securing the maximum possible tax savings for your business.
What is capital allowance tax relief?
If you are an individual, partnership or company, and you have spent capital investing in or improving commercial property, you may be eligible for capital allowance tax relief.
It is a form of tax relief that allows commercial property owners to claim back capital expenditure on qualifying items, including the unclaimed expenditure of previous owners.
What is capital allowance tax relief and who is eligible?
To qualify for capital allowance tax relief on property, you must satisfy the following criteria:
- be carrying on a qualifying activity, and
- incur qualifying expenditure, ie; capital expenditure on plant or machinery wholly or partly for the purposes of the qualifying activity.
The range of qualifying activities is wide and, broadly speaking, covers all taxable activities other than passive investment, including a trade, profession, vocation, office, employment or an ordinary property business.
It therefore does not matter in what capacity the commercial property is owned, for example, as a private individual or a limited company, or whether the property is owned as a stand-alone investment or in the course of your everyday business.
Furthermore, this form of tax relief can apply to all types of commercial property including, but not limited to: restaurants, public houses, hotels, retail stores, petrol stations, dental surgeries, veterinary surgeries, medical centres, nursing homes, office blocks, car showrooms or student residences, to name but a few.
What is capital allowance tax relief qualifying expenditure?
As the law currently stands the actual acquisition cost of a commercial property will not, in itself, attract capital allowances.
However, for tax purposes, it is possible to separate the cost of the land, bricks and mortar from the fixed plant and machinery that allow the building to function, and thus the element that qualifies for tax relief.
As such, where part of the cost relates to assets incorporated into a building, ie; its’ integral fixtures and features essential for a business to carry out its trade, you may be entitled to claim capital allowances.
Typically, this is where we see the most untapped potential for tax relief, where these fixtures and features were either inherent within the property at the time of acquisition or have been subsequently installed.
What is capital allowance for integral features?
Broadly speaking, the provision or replacement of an integral feature of a building or structure, wholly or partly for the purposes of carrying on a qualifying activity, will satisfy the capital allowance criteria.
In particular, each of the following is an integral feature of a building or structure:
- an electrical system, including a lighting system
- a cold water system
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- a lift, an escalator or a moving walkway
- external solar shading
In contrast, there are many items that do not qualify for capital allowances, for example, items that are deemed part of the fabric of the building, such as windows, doors and fixed partitions.
There is no definitive list of what does, or does not constitute, an integral fixture or feature. It can, therefore, be very difficult to determine the extent of any qualifying expenditure, so professional advice should always be sought here.
What is capital allowance tax relief when buying or selling property?
At the point of acquisition or disposal of a commercial property, any unclaimed capital allowances can make a real difference to the value of any potential deal. In particular, they can be used as a bargaining tool to help facilitate the sale or purchase of a property.
From a vendor’s perspective, any unclaimed allowance is a benefit that could be offered to a potential buyer to make the deal much more attractive.
From a buyer’s perspective, knowing that a capital allowance claim can be made on transfer of ownership can significantly alter the net cost of the purchase, making a deal far more affordable.
Capital allowances, where available, should, therefore, form an integral part of any negotiation process when buying or selling commercial property.
That said, in many cases, a commercial property may change hands without either party being aware of the potential tax benefits that are at stake. Indeed, a very lucky buyer may inadvertently benefit from a capital allowance windfall.
What is capital allowance tax relief and the Annual Investment Allowance?
The Annual Investment Allowance was introduced over a decade ago and can be used to deduct the full value of qualifying capital expenditure in the year you incur the cost.
This allows you to deduct 100% of the cost of qualifying items in the year in which the expense was incurred.
The level at which this allowance is set has changed several times, most recently in January 2019 when it was substantially increased from £200,000 to £1 million.
It is to remain at this level until 1 January 2021, when it is set to revert back to £200,000.
What is Structures and Buildings Allowance?
Structures and Buildings Allowance (SBA) is available for the construction of non-residential property, where the aim is to encourage investment in the construction of new structures and buildings, and the improvement of existing ones, intended for commercial use.
This government measure directly addresses a gap in the rules over previous years, where no relief has been available for most structures and buildings, even though capital allowances are available for plant and machinery that form integral features of buildings.
It applies for both income tax and corporation tax.
The SBA allowance will be allowed on eligible construction costs incurred on or after 29 October 2018, at a rate of 3% of cost on a straight-line basis for a 33 and half year period (down from 50 years prior to April 2020).
Note, the cost of constructing a dwelling, or to acquire the land itself, even if for commercial use, will not be eligible for relief.
Although residential dwellings are specifically excluded, where there is mixed use, for example, between commercial and residential units in a development, the available tax relief will be reduced by apportionment.
Assets such as plant and machinery are also not eligible for this new allowance, although these items continue to qualify for standard capital allowance tax relief and the increased cap under the Annual Investment Allowance.
Key takeaway for “What is capital allowance tax relief on property?”
Capital allowance tax relief on property is often overlooked and undervalued by commercial property owners.
By increasing cash flow and reducing your overall tax liability, this form of relief can make a real difference to the success of your business, or even the success of the sale of your business.
Moreover, with the recent introduction of new measures, you can take advantage of substantially improved capital allowances right now.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.