Capital Allowances are tax deductible amounts to compensate or give relief for the diminution over time in the value of an asset.
Those of relevance and considered here are: Plant and Machinery, Agricultural Buildings and Works, Business Premises Renovation, Dwelling houses let on Assured Shorthold Tenancies, Conversion of space over shops etc into flats, and Industrial Buildings.
Capital Allowances are available on Plant and Machinery used for the maintenance, management or repair of the let premises, but not on items used in dwelling houses (but see “conversion of former residential space over shops etc into flats – see below).
For example if you own an office building and a house both let out, and you install a lift in both, you may claim Capital Allowances on the cost of the installation in the commercial premises but not on the cost of the installation in the residential property.
For expenditure incurred on or after 11th May 2001 100% Capital Allowances are available in respect of the costs of conversion of former residential space over shops etc into flats for letting.
This means that as long as you satisfy the conditions you can set off the cost of the conversion work (which is normally a capital cost as it is the cost of creating a new asset) against your rental income.
To qualify the part of the building being converted or flat being renovated must have been used only for storage during the twelve months preceding the commencement of the work. The main conditions are as follows:
The flat must be held for short term letting (leases of five years or less).
The building must have been completed before 1st January 1980 and it must have no more than four storeys above the ground floor.
All or almost all of the ground floor must be authorised for business use.
It must be suitable for letting
It must have an entrance that is not through the ground floor business premises.
There is a limit to the rent charged with one figure for Greater London and another for the rest of the UK. This is shown in the table below.
|Bedrooms||Greater London||Outside Greater London|
|1 or 2||£350 per week||£150 per week|
|3||£425 per week||£225 per week|
|4||£480 per week||£300 per week|
It must not be let to a person connected with the person who incurred the expenditure.
A motor car or van used in the management of rental property will attract capital allowances but you must establish what proportion of the total mileage is for this purpose and restrict the allowances claim accordingly.
It may be easier to maintain a business mileage record and claim the higher approved mileage rate which includes a “cost of ownership” element.
A “Wear and Tear Allowance” is available in respect of the contents of a residential property that has been let fully furnished. No such allowance is available in respect of partly furnished or unfurnished property.
If your investment property is all residential then stop reading here – the remainder of this article applies to different types of property.
The Capital Allowances on Agricultural Buildings and Works is being withdrawn gradually.
For 2008-09 the rate is 3%, for 2009-10 it is 2% and for 2010-11 it is 1%. Then it ceases.
The allowance is available in respect of the cost of construction of relevant buildings and the ancillary works e.g. architects fees, drainage schemes.
A maximum of one third of the expenditure on a farmhouse may qualify.
When you buy your investment farm you should enquire as to the allowances claimed by previous owners.
Expenditure on land is specifically excluded.
The person entitled to claim is the person with a ”relevant interest” – normally the owner. In other words the unused allowances can pass from one owner to the next – until the scheme is scrapped in 2011.
Dwelling Houses let on AST’s (Assured Shorthold Tenancies) qualify for Capital Allowances, but only if you are an “Approved Body” e.g. Housing Association.
The Capital Allowance on Industrial Buildings is being withdrawn gradually.
For 2008-09 the rate is 3%, for 2009-10 it is 2% and for 2010-11 it is 1%. Then it ceases. The definitions exclude offices unless they form less than 25% of an otherwise qualifying building.
Discussion of the Capital Allowances available in connection with expenditure on Mineral Extraction, Patent Rights, or Research and Development are considered to be outside the scope of this article as they are unlikely to be of relevance to most landlords.
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