Capital allowances offer significant tax advantages for commercial property investors, allowing for tax credits and refunds based on embedded fixtures and fittings.
By enabling businesses to deduct these costs from their taxable profits, capital allowances reduce tax liabilities and release funds for reinvestment.
In this Friday Tax Tip, we discuss what Capital Allowances are, how you may be eligible for them, and why you or your accountant will have missed them.
(Read Time: Approx. 8 minutes)
Topics Discussed:
- An exploration of capital allowances and their strategic importance to commercial property investments.
- Instructions on how to utilise each type of capital allowance effectively.
Understanding Capital Allowances
Capital Allowances permit the deduction of embedded fixtures and fittings costs related to the acquisition, improvement, and enhancement of commercial properties from taxable profits.
Capital allowances are often missed by many business owners, with as many as 9 out of 10 commercial property owners not making a claim on expenses which can be refunded in tax credits.
Guide to Types of Capital Allowances
Annual Investment Allowance (AIA)
The AIA lets commercial property investors deduct the total cost of qualifying plant and machinery (except cars), up to £1 million.
This is great for those doing upgrades or installations, as it offers immediate tax savings, improving cash flow and investment ability.
You get a fresh AIA each financial year.
Writing-Down Allowance (WDA)
If your costs exceed the AIA limit or don’t qualify, the WDA lets you spread your deduction over several years.
Assets fall into two categories: the Main Pool, with a deduction rate of 18% for general equipment, and the Special Rate Pool, at 6% for integral features and longer-lasting assets.
First-Year Allowances (FYA)
FYA boosts investment in eco-friendly and energy-efficient gear by allowing you to write off the full cost in the purchase year.
This supports greener practices in commercial property management.
Structures and Buildings Allowance (SBA)
Aimed at new constructions or major renovations started on or after 29 October 2018, the SBA provides a steady 3% deduction annually.
This allowance, spread over 33 years, helps fund long-term property projects.
Eligible costs include design fees, site preparation, construction, and fitting out.
Remember, you can only claim these allowances based on the original market value of the property and the direct costs of construction or renovation.
Implementing and Claiming Your Allowances
Calculating Capital Allowances
Capital allowance calculations represent a trading expense and are deducted when calculating the trading profit for the relevant accounting period.
If a property business purchases an asset for £10,000 with a Writing Down Allowance (WDA) rate of 18% per annum, it would receive £1,800 in allowances in the first year, leaving a balance of £8,200.
The following year, the allowance calculation would use this reduced balance, resulting in an allowance of £1,476.
Capital allowances must be actively claimed within a tax return to be granted.
Recommendations for Maximising Capital Allowances
It is advisable to calculate capital allowances around the time qualifying assets are purchased or installed.
Timely calculation prevents missed claims, ensuring that all expenditures are accurately recorded and maximised.
Impact on Taxes
Capital allowances significantly reduce taxable profits, thereby lowering tax liabilities and improving cash flow.
For example, a £50,000 claim could save £9,500 in taxes at a 19% tax rate.
Common Pitfalls in Claiming Capital Allowances
Mistakes in capital allowances claims can lead to missed tax relief opportunities.
These include failing to identify all eligible assets, inaccurately claiming the allowances, and not maintaining proper records.
Seeking professional advice can mitigate these risks and ensure compliance and maximisation of benefits.
Many accountants aren’t well versed in this specialist area of tax, and your accountant may not have the skillset to carry out the work necessary.
A Case Study of a Successful Claim
Consider the case of an engineering company that acquired a new-build industrial workspace.
This commercial property, complete with self-contained workshop and storage space along with mezzanine areas designed for office and welfare facilities, was purchased for a total of £1,039,500, including SDLT and legal fees, with the contract completing on 15 March 2021.
Tax Expert was able to complete their Capital Allowances claim on their behalf, and successfully allocate the correct items to the claim, which totalled £301,422.99 in tax credits.
Property Details:
- Location and Type: a new-build industrial workspace with extensive facilities including a workshop, storage spaces, and office areas.
- Features: The property is equipped with hot and cold-water systems, electrical installations, and various specialist machinery. It also includes external car parking areas.
Vendor Position
The vendor, owning the property since before April 2008, utilised it primarily as a factory and workshop.
During their ownership, they did not claim capital allowances on any qualifying fixtures, thus preserving the entitlement for the new owners to claim on pre-2008 fixtures categorised as main pool assets.
Method of Valuation
A just and reasonable apportionment was conducted on the purchase price, in line with the provisions of CAA 2001 section 562, allowing for precise capital allowances claims.
Capital Allowances Valuation Summary:
- Expenditure Not Eligible for Capital Allowances (Land): £274,080.00
- Eligible Plant and Machinery Expenditure: £301,422.99
- Expenditure Not Eligible for Capital Allowances (Building Structure): £463,997.01
- Total Purchase Price: £1,039,500.00
Through diligent work, Tax Expert was able to identify £301,422.99 in potential Capital Allowance claims on the building.
This strategic approach in the acquisition and valuation process enabled LIJ Fluid Power Limited to maximise their capital allowances benefits effectively.
By precisely segmenting and valuing different components of the property purchase, they ensured optimal tax relief, significantly reducing their taxable income for that tax year.
A Case Study of a Second Successful Claim
Consider the case of a company that acquired a leasehold interest in a commercial property.
This four-story detached building, located in an undisclosed location, features office spaces, kitchenettes, and consultation rooms/private offices with additional storage space on the lower ground and attic floors. Externally, it boasts a tarmac car park at the rear.
The property, equipped with general power, lighting, and cold-water installations, was acquired for a total of £440,000, including SDLT and legal fees, with the contract completing on 06 October 2022.
Tax Expert was able to complete their Capital Allowances claim on their behalf and successfully allocate the correct items to the claim, which totalled £44,297 in tax credits
Property Details:
- Location and Type: A four-story detached commercial building with office spaces, kitchenettes, and various consultation rooms, along with storage facilities.
- Features: The property includes essential building services like general power, lighting, and a cold-water system, and has a tarmac car park at the rear.
Vendor Position
The vendor, owning the property since 23 March 2005, was not entitled to claim capital allowances on certain fixtures qualifying for allowances on integral features, as the property was acquired before the introduction of the integral features legislation.
Method of Valuation
A just and reasonable apportionment was conducted on the purchase price, in line with the provisions of CAA 2001 section 562, allowing for precise capital allowances claims.
Capital Allowances Valuation Summary:
- Expenditure Not Eligible for Capital Allowances (Land): £26,398
- Eligible Plant and Machinery Expenditure: £44,297
- Expenditure Not Eligible for Capital Allowances (Building Structure): £382,797
- Total Purchase Price: £453,492
Through diligent work, Tax Expert was able to identify £44,297 in potential Capital Allowance claims on the building.
This strategic approach in the acquisition and valuation process enabled the company to maximise their capital allowances benefits effectively.
By precisely segmenting and valuing different components of the property purchase, they ensured optimal tax relief, significantly reducing their taxable income for that tax year.
Securing Your Claim with Tax Expert
Following the comprehensive approach demonstrated by our case study, ensuring the accuracy and compliance of your capital allowances claim is paramount.
At Tax Expert, we specialise in securing and substantiating such claims, providing our clients with expert guidance and support throughout the process.
Our team of professionals are specialised in the complexities of Capital Allowances, ensuring that every claim is maximised and fully compliant with current tax laws.
Engage with Tax Expert to leverage our expertise for your benefit, ensuring that your property investments are as profitable and tax efficient as possible.
In Summary
With careful planning and expert advice, Capital Allowances can transform substantial expenditures into significant tax-saving opportunities, creating a financially sound investment strategy.
If you have commercial property, whether a new build or refurbishment, it’s likely you’ll be able tax credits using Capital Allowances.
Your accountant may have missed what our Capital Allowances specialists won’t.
Call us today to for a FREE assessment of the eligibility of your claim, and the likely amount of your claim.
Contact us today at 01772 788200 to find out more about how we can help, or WhatsApp us out-of-hours at 07787 010190.
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Kind regards,
Ilyas Patel