Capital allowances are much misunderstood by landlords who often do not realise they can make a claim for the relief that reduces the income tax they pay on profits.
The benefit of capital allowances is they are subtracted pound-for-pound from property business profits before calculating tax.
Any landlord can make a claim – including property companies.
Capital allowances are also in addition to, not instead of, any claim for replacement relief.
- 1 What are property business capital allowances?
- 2 The key capital allowance rules
- 3 Claiming capital allowance tax relief
- 4 Replacement Relief
- 5 What is a repair?
- 6 Landlord capital allowances FAQ
- 6.1 Where can landlords find out more about capital allowances?
- 6.2 Can I claim capital allowances for my car?
- 6.3 Is there a list of plant and machinery for claiming capital allowances?
- 6.4 How do I work out my capital allowance claim?
- 6.5 Do I need to ask HMRC if I can apply for capital allowances?
- 6.6 More Tax Information
What are property business capital allowances?
Capital allowances are a special tax relief on the tools and equipment landlord’s need to run a property business.
They typically apply to one-off purchases rather than day-to-day business expenses.
For example, buying a computer is classed as a capital cost as the asset is likely to have a life of more than a year but replacing the ink cartridges in a printer are general revenue costs.
The price of the ink is offset against profits as a business expense, but the cost of the computer is depreciated to reflect any loss in value over time.
An important point to remember is capital allowances cannot be applied to residential property, which reduces the tax relief a landlord can claim, but does not mean a claim cannot be made.
Capital allowance claims are split into categories or pools. The main category for a landlord claim is plant and machinery.
This includes vans, tools, ladders, computers, office furniture and equipment in common areas of shared house.
The key capital allowance rules
The points to remember are:
- The property business must own the asset
- The asset must be for general business use and not tied to a particular property – for example furnishings or white goods supplied with furnished accommodation
- The tax relief applies to capital spending
- Property business capital allowances apply to long-term rented homes, not holiday lets which have different rules
- Capital allowances can reduce profits or increase losses
- Capital allowances are tied to the property business accounting period and renew each year
Claiming capital allowance tax relief
Claiming capital allowances is open to sole traders, partners or companies.
Simply include the figures in the appropriate boxes on a self-assessment or corporation tax return.
The trick is knowing what to claim and working out the computation, which is often a job best left to a tax professional if you do not understand the rules.
Capital allowances are offset by the Annual Investment Allowance (AIA).
The AIA is £1 million a year until December 31, 2020, then drops to £200,000 from January 1, 2021.
Under the AIA, a property business can claim the entire cost of capital spending up to the limits during the year.
For example, a landlord buys gardening equipment worth £10,000 to use to keep the gardens tidy for a portfolio of five properties. During the year, the rental profit from the portfolio is £50,000. The £10,000 AIA is deducted in full, reducing the taxable profit to £40,000.
Replacements and repairs at rented properties or to business assets are reclaimed under separate rules as a revenue expense.
To qualify for the relief, the repair or replacement must pass four tests:
- The claim must be made by a property business that lets residential property
- Any replaced equipment must be for exclusive use of the renter and the old item removed
- The item must be ‘wholly and exclusively’ for the property business
- No capital allowances can be claimed on the new item
Another point to remember is replacement relief is not available for holiday lets or property rented out under the Rent A Room Scheme.
Providing the replacement is a like-for-like swap and not an improvement, the full cost goes into the property business accounts as a business expense.
If the replacement is an upgrade, the cost goes into the accounts as the lower of the cost of the item or the cost of replacing the old item like-for-like.
If the old item is sold or traded in, the cost in the accounts is the purchase price less the trade-in or sale value.
HMRC gives this example in online guidance for tax inspectors:
A landlord buys a new fridge costing £800. They trade in the old fridge which is given a value of £300 and meet the rest of the cost with £500 cash. The amount of the deduction for replacement the item would be £500. No deduction is given for the £300 trade in value of the old item.
Replacement relief applies to domestic items, which include:
- Furniture like sofas, tables and beds
- Soft furnishings like curtains, rugs and carpets
- Household appliances like fridges, freezers and washing machines
- Kitchenware like utensils, crockery and cutlery
What is a repair?
A repair is the renewal or replacement of part of an item – like a pump for a washing machine.
Even though the repair may be to a capital purchase, any repair is treated as a revenue business expense.
Landlord capital allowances FAQ
Working out the difference between capital and revenue expenses is not always easy for landlords.
But if you’re worried about making a claim for capital allowances, here are the answers to some of the most asked questions about the tax relief.
Where can landlords find out more about capital allowances?
HM Revenue and Customs publishes online guidance for tax inspectors that is free to access. Don’t forget the manuals are guidance and not law.
Can I claim capital allowances for my car?
No. landlords are better to claim business travel expenses for cars with a split business/private use
Is there a list of plant and machinery for claiming capital allowances?
No. Each item is considered on its own merits by HMRC and the list of inclusions mainly arises from case law over the years
How do I work out my capital allowance claim?
Few property businesses will spend more than the AIA on buying new business assets in a year, so simply list the assets and reclaim the whole amount vis a self-assessment or corporation tax return.
The amount is then deducted from your property business profit or added to the loss.
If you are in profit, tax due in the year is reduced by the relief, while if you make a loss, carry the amount forward to reduce profits in future years so you do not lose the relief.
Do I need to ask HMRC if I can apply for capital allowances?
No. Just make the claim and if HMRC has any issues they will come back with any questions.