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Tax Relief Explained

 

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“Property’s best kept secret” as it has been previously referred to in the Estates Gazette has been around for a very long time.”

Capital allowances were established in 1878 by the treasury, as a means of increasing tax receipts by influencing the rate of depreciation of certain assets used by businesses.

Before the introduction of the Wear and Tear Act, the first tax depreciation act, taxpayers could control the rate of depreciation, which meant that in most cases they were depreciating them quickly, so they had less profits and therefore paying less tax. The Wear and Tear Act in 1878, enshrined in law that accounting depreciation is not tax deductible, instead the HMRC would determine the rate at which you can depreciate your asset.

In the context of commercial property, the purpose of capital allowances is to encourage continued investment in plant and machinery within buildings. The advantage of claiming this tax relief is, that it provides a welcome cash flow advantage to claimants, in that they are not paying unnecessary tax to HM Revenue and customs. Consequently, this helps to lower the risk of an investment, as more funds are therefore available to pay investors and lenders.

In what situations is Capital Allowances Claimed?

In the context of property, it is a tax relief on commercial property which is available when you:

  • Construct a property
  • Alter or refurbish a property
  • Fit out a property
  • Contribute towards a tenant’s fit out (provided the tenant can also use capital allowances).
  • Purchase a commercial property

What items qualify for Capital Allowances?

Within the context of a commercial property Capital Allowances are claimed on plant and machinery including, fixtures and furnishings both within the curtilage of the property (providing that the claimant has the relevant interest). However, you cannot claim capital allowances on the cost of the building (subject to certain exclusions).

The expenditure must be capital expenditure on the provision of plant or machinery, wholly or partly for the purposes of a qualifying activity (such as a trade or investment business) that the person incurring the expenditure carries on. In addition, the person incurring the expenditure must own the plant or machinery as a result of incurring the expenditure

What properties can you claim on?

Capital allowances are relevant to all commercial property, renewable energy developments, waste developments and some residential (but not the areas used as actual dwellings). In addition, they can also be claimed for qualifying plant and machinery and certain structural works in new build, refurbished or purchased property along with fit-outs (where they are deemed to be incidental to the installation of plant and machinery).

Typical properties on which capital allowances are claimed on include:

  • Industrial property
  • Offices
  • Retail
  • Hotels
  • Care homes
  • Privately funded hospitals
  • Privately funded schools
  • Furnished holiday lettings
  • Core areas of student’s accommodation
  • Furnished Holiday Lettings (EEA area)

Capital allowances are not available for properties that fall within the definition of a dwelling. However, they are still available for some residential properties:

  • Common parts of apartment blocks
  • Common parts of Student Accommodation
  • Nursing homes
  • Prisons
  • Furnished Holiday Lettings

Who can Claim Capital Allowances?

The first stipulation is that anyone claiming capital allowances must be liable to UK income or corporation tax on the profits arising from their business activity. Further, to qualify for plant and machinery allowances, a taxpayer must incur capital expenditure upon the provision of plant and machinery, which is owned by him and is used in the course of his trade. Finally, the taxpayer must have the “relevant interest” in the property, which generally but not exclusively includes the freehold, heritable title, or leasehold in the property.

Property developers and traders, who buy or build a property with the intention of selling it at a profit, would not be entitled to claim allowances, as the expenditure they incur in relation to the property is a trading expense going through the profit and loss account rather than capital expenditure which is contained within the balance sheet. It is worth noting however, that developers may enhance their sale price by making potential buyers aware of tax saving opportunities.

If you’d like more detailed information or you want to arrange an appointment to discuss your requirements, please contact us.

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The opportunity to claim property tax relief in the form of capital allowances arises when a taxpayer incurs capital expenditure on plant and machinery, which is used in their business. Expenditure incurred on “qualifying items” (as set out in the Capital Allowances Act 2001) is then available to be deducted from the taxpayers “taxable” income meaning that they should pay less tax.

Capital allowances provide taxpayers with the facility to write down the costs of qualifying plant and machinery assets against their taxable income. A taxpayer who uses the benefits that the current UK statute provides to proactively claims property tax reliefs will benefit in a number of ways:

  • receive cash flow advantages by not paying unnecessary tax.
  • property tax reliefs can lower the risk of an investment and help to make a project a reality.
  • property tax reliefs can also make property investment worthwhile and may help to sell the property.

Cavetta Consulting specialises in obtaining tax relief on property in the form of Capital Allowances and Land Remediation Relief. There are a number of different types of allowances including:

  • Plant and Machinery Allowances (8% / 18%)
  • Enhanced Capital Allowances (100%)
  • Business Premises Renovation Allowance (100% ending 31 December 2017)
  • Annual Investment Allowance (£200K)
  • Research and Development Allowances (100%)
  • Repairs and Maintenance (100%)
  • Enterprise Zone Allowances (100%)
  • Land Remediation Relief (150%)
  • Derelict Land Relief (150%)

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