CAPITAL ALLOWANCES - 27.08.2020

Landlord clients and capital allowances

Capital allowances (CAs) are a complicated area, especially when it comes to property rental businesses. Contrary to a popular misconception, landlords can claim some CAs. What can you advise to ensure your clients don’t miss out?

Recap - capital expenditure

For tax purposes, there are no deductions for money spent on equipment used in a business. Instead, capital allowances (CAs) are given. These have their own rules which include special limitations and restrictions, for example where CAs create or increase a loss in a property rental business. Before looking at this point in detail it’s important to know when your clients can claim CAs and to dispel some common misconceptions.

Dwellings

HMRC’s guidance on CAs for landlords of residential accommodation isn’t as clear as it could be. Broadly, it implies that they can’t be claimed, except where the property is qualifying furnished holiday accommodation. Actually, what the legislation says is that clients can’t claim CAs for equipment “for use in a dwelling-house”. HMRC interprets this as meaning the cost of equipment for use in the property by tenants doesn’t qualify for CAs.

Pro advice. This restriction doesn’t apply to equipment your clients need to run their residential property letting businesses.

What qualifies?

Your clients can claim CAs for the cost of equipment if it has an expected life of more than two years, and they use it to maintain the residential property. This covers anything from power tools to a computer. However, you must restrict the claim proportionately to account for any non-business use. A different rule applies to capital items your clients buy for use by their tenants.

Domestic items

Subject to conditions, a different system allows a normal tax deduction, i.e. not CAs, for the cost of renewing capital “domestic items” used by the tenant, e.g. movable furniture such as beds, wardrobes, TVs, curtains, carpets, crockery, cutlery as well and household appliances like fridges and washing machines.

Commercial property

If your clients let non-residential (commercial) property, the restriction and special rules for the purchase of capital items don’t apply. They can claim CAs for the cost of all equipment they buy for use in the property or by them to manage the property.

Mixed portfolio

Where your clients let both residential and commercial property it’s treated as a single business. This means profits and losses from all the properties must be aggregated to arrive at the taxable amount. If there’s an overall loss it can be used to reduce taxable profits for any subsequent year. The trouble is that until they make a profit there’s no tax relief at all. However, what’s often overlooked is that there’s an exception where all or part of the loss relates to CAs.

Pro advice. Clients can reduce their general tax bill by claiming rental property loss relief against tax paid on their other income, e.g. from employment, in the same year as the loss arose or the one following. Further guidance is available at PIM4220 (see Follow up ).

HMRC guidance - PIM4220

Your clients can claim CAs for equipment used for any property business, except for items used by the tenant of residential accommodation (for which a special deduction is allowed). Where CAs cause or increase a loss they can use sideways loss relief to reduce the tax on their other income, e.g. from employment.

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