Under the UK tax system, a business which spends money on capital assets for use in its business cannot claim a tax deduction for that expenditure. Instead a tax relief called a capital allowance may be available for certain types of expenditure.
The aim of capital allowances is to give tax relief for the reduction in value of certain capital assets used by a business, by letting the business write off the cost of the assets over a number of years against the taxable income of the business.
Some buildings may qualify for new structures and buildings allowances – see article Structures and Buildings Allowance.
Even if allowances are not available in respect of the building itself, buildings will contain items of plant and machinery such as lifts, heating systems, air conditioning etc which may qualify for allowances.
Availability of capital allowances can be an important consideration on the sale or purchase of a commercial building.
Residential property
You can only claim for items in residential property if your business qualifies as a furnished holiday lettings business. In each year the property must be:
- available for holiday letting for 210 days
- let for 105 days or more
- Not occupied by long term tenants (i.e. those who stay for more than 31 days) for more than 155 days of the tax year.
See article Furnished holiday lettings
Commercial property
Plant and machinery allowances
Writing down allowances are available in respect of expenditure on certain types of plant and machinery. Details of what constitutes plant and machinery can be found in HMRC guidance.
Writing-down allowances are annual allowances that a business can claim to reduce or ‘write down’ any remaining balance of capital expenditure on plant and machinery that the business has not already claimed a capital allowance for.
There are two different rates of capital allowance – the main rate of 18% and the ‘special rate’ of 8%. The special rate reduces to 6% from April 2019.
Most plant and machinery will fall within the main pool. However, certain assets in a building are designated as ‘integral features’ and qualify for allowances at the lower special rate. The following are designated as integral features e.g. an electrical/lighting system, a cold water system etc.
There are special rules which enable an election to be made in respect of assets with an expected useful life of less than 8 years (short life assets) which enable the full benefit of the allowances to be obtained more quickly.
With regards to cars, 100% first year allowance can be claimed against low emission cars. The emissions criteria which must be met in order to qualify for the 100% first-year allowance depends on the date on which the expenditure is incurred. Where the car is purchased on or after 1 April 2015 and before 1 April 2018, the first-year allowance is available if the CO2 emissions are 75g/km or less. Where the expenditure is incurred on or after 1 April 2018 and before 1 April 2021, the emissions must be 50g/km or less to qualify for the first-year allowance.
If not, cars go to the special rate pool, and are not eligible for the annual investment allowance.
Annual investment allowance
Businesses can claim an annual investment allowance for capital expenditure incurred on most items of plant and machinery. The annual investment allowance gives 100% capital allowances on expenditure up to £200,000 a year. Businesses which are members of a group of companies only get one annual investment allowance for the whole group.
It was announced in the 2018 budget that the annual investment allowance will be temporarily increased to £1 million for 2019 and 2020 – see blog Increased AIA from 1 January 2019
Capital allowances on a property sale or purchase
When a property is sold, if the seller has been claiming capital allowances in respect of plant and machinery within the building which constitute fixtures for land law purposes, it will need to work out what part of the sale proceeds are attributable to the assets which qualified for allowances. This figure will need to be brought into the seller’s capital allowance computations.
A buyer who is hoping to claim allowances in respect of plant and machinery in a building will also need a figure on which to claim allowances.
The general position for working out the amount of sale proceeds of a building which relate to assets qualifying for allowances is to carry out a just and reasonable apportionment.
If the buyer is to be able to claim allowances in respect of machinery and plant in the property ‘which constitutes a fixture’, tax legislation requires the parties to enter into an election (a ‘section 198 election’) to fix the value at whatever amount they choose, within certain parameters.
From April 2014 a buyer of a building is only able to obtain capital allowances if the seller has ‘pooled’ its expenditure on the fixtures for capital allowance purposes in a chargeable period when it owned the property. Pooling means adding the expenditure to the seller’s capital allowance pool – although the seller does not have to have claimed a writing down allowance.
The pooling requirement is in addition to the requirement to have fixed the value of the fixtures by entering into a section 198 election.
Capital allowances and leases
When a lease is granted, allowances in relation to the fixtures within the building will remain with the landlord, unless the lease is granted at a premium and an election (a ‘section 183 election’) is made for the allowances to pass to the tenant.
However, tenants will usually be able to claim allowances in respect of expenditure they have incurred on items qualifying for allowances as part of their fit out of the premises. Any contribution by the landlord to the fit out of the property needs to be carefully structured so as not to prejudice the availability of allowances for the tenant.