Countdown to April 2020: capital allowances

Real estate investment companies can often benefit from tax relief on capital expenditure. 

In principle, expenditure on plant and machinery which has a function and is used in the business will generally qualify for capital allowances. Typically, a claim is made in the corporation tax return, usually in the year in which the assets are purchased. However, while prima facie, buildings and structures are deemed to be non-qualifying for capital allowances, they often contain a significant number of features embedded into the fabric and structure, which will be qualifying as plant and machinery.

However, many offshore companies have not sought to maximise these because they have been able to benefit from other tax assets (primarily tax losses and loan interest costs) in order to shelter their rental income from UK taxation. The rules effective from April 2020, are likely to make reliance on these much harder. 

So what type of capital allowances are there?

The main types of allowances are: for qualifying plant and machinery.

Type Rate of Tax Relief Qualifying expenditure
Annual Investment Allowance (AIA) 100% per annum

The AIA provides 100% tax relief for expenditure on plant and machinery (except cars) up to an annual limit. The AIA limit is currently set at an elevated level of £1m.
This means a company can effectively receive 100% tax relief against its profits for qualifying expenditure up to the annual limit. Once the limit is reached, relief is given on further expenditure through the second type of allowance, writing down allowances.

Main 18% per annum on a reducing balance basis Plant and machinery not in another pool.
Special rate 6% per annum on a reducing balance basis
  • Parts of a building considered ‘integral’ such as electrical systems, air conditioning, lifts or space and water heating systems.
  • Thermal insulation of buildings.
Short life asset 18% per annum on a reducing balance basis Assets not expected to last more than 8 years (except cars) such as computer equipment.
Accelerated balancing allowances are available when short life assets are disposed of.
First year allowances (FYA) 100% per annum FYAs is another 100% allowance which can be claimed on energy saving plant and machinery, such as pipework insulation or automatic light dimming controls. FYAs have no effect on the AIA limit, so a 100% deduction from profits can be claimed for these costs on top of the AIA.
In the event that a company has a tax adjusted loss in the year, it can surrender the loss attributable to FYAs in exchange for a tax credit (subject to certain conditions).
Structure and buildings allowance (SBA) 2% per annum on a straight line basis Announced in 2018, this relief will be available eligible construction costs incurred on or after 29 October 2018.
Further details can be found here.

Will this be available to my property?

Clearly, the variety of reliefs available mean that the matter should not be ignored. The reliefs are applicable to a wide range of scenarios including commercial properties, care homes, student accommodation and even certain aspects of residential properties.

Even if the property and capital expenditure was incurred a number of years earlier, or there is limited information available to support a claim, a discussion and review by our experienced specialists. 

Where can I find more details and what should I do now?

Further information can be found here. This also outlines the common myths circulated as to why relief may be limited.

Our capital allowances team work closely with our real estate tax specialists in order to consider how best to deliver value. The capital allowances team use qualified surveyors, who combined with the relevant tax knowledge, ensure they can undertake a detailed review of properties to maximise potential tax relief available.

For further information please contact Adrian Benosiglio, Peter Graham, or Rupert Guppy.