Increases to Annual Investment Allowance

The recent Budget brought a number of changes for capital allowances, with the key point being the increased Annual Investment Allowance (AIA).

From 1 January 2019 the AIA will be £1m pa for two years, the highest it has ever been. This is a significant increase and as a result businesses need to consider the timing of capital expenditure, particularly when their year end will straddle the date of the increase. It may therefore be worthwhile delaying expenditure into 2019 or beyond to take advantage of the higher allowance and the cashflow advantage it will give.

For example a care home business with a June 2019 year end will have an AIA of £600k - £100k in the six months to December and £500k in the following six months to June on a pro rata basis. If they incur qualifying capital expenditure of £1.1m in the year to June 2019 then £600k will be covered by the AIA and the other £500k will get writing down allowances, some of which could be as low as at 6 per cent. This element could take over 30 years to receive all of the tax relief available. 

However if they are able to delay £500k of expenditure into the following year end when they will get another £1m of AIA, then 100 per cent of the tax relief will arise in two years giving a huge increase in cashflow as a result of an immediate reduction in their tax liabilities. This equates to nearly £84k of accelerated tax savings in the first two years.

This rule change is also applicable to property transactions currently in progress. As well as ensuring that they have negotiated the capital allowance position with the seller, buyers may wish to consider delaying completion until January in order to take full advantage of the AIA available to them.

If you have clients who are about to undertake capital projects and will be incurring significant expenditure then it is recommended that they discuss their circumstances with RSM before the project commences as each individual scenario will differ.

For more information please get in touch with Rupert Guppy or Peter Graham.