There are detailed rules governing which types of assets qualify for special capital allowances in rental property investment operations.
There are basically two methods of calculating and deducting allowances against property income:
- The reducing balance method – where a fixed percentage is applied each year to the remaining balance of your capital expenditure. For example, if you spent £10,000 on a fire system for your building you would normally get 25% or £2,500 in year one. In year two you would get 25% of £7,500 and so on…
- The straight line method – where the allowance is the same each year until all the expenditure is relieved. For example, if you spent £100,000 on an industrial building, you would normally get a fixed allowance of 4% or £4,000 for 25 years.
In a few exceptional cases a 100% allowance is made available in year one – this is where the government may want to encourage investment in, say, environmental issues, or the old Enterprise Zones.