Capital allowances: introduction
The PIM provides an introduction to aspects of the capital allowances legislation that affects property income. The detailed guidance is in the Capital Allowances manual.
Allowances for capital expenditure
In arriving at the profit or loss of a rental business for tax purposes you cannot make any deductions for capital expenditure. This means you must not deduct the following in working out rental business profits:
- the cost of buying, altering, building, installing or improving fixed assets used in the rental business, or
- the depreciation of any capital asset (land, leases and other interests in land, buildings, plant, machinery, etc), or
- any loss which arises on the sale of any capital asset.
More information about capital expenditure is in PIM2020.
But a taxpayer may be able to claim special tax allowances to take account of the depreciation of some capital assets (but not land) used for rental business purposes. There are three main categories of allowance. These are:
- ‘capital allowances’ (see PIM3000 onwards),
- ‘wear and tear allowance’ (see PIM3200),
- ‘renewals allowance’ (see PIM3200).
For the special expenses rule about the cost of sea walls see PIM2050.
An allowance may also be due for the cost of installing:
- loft, cavity wall or solid wall insulation,
- draught proofing and insulation for hot water systems,
in a residential property which is let (PIM2015).
Tax allowances called ‘capital allowances’ can be claimed for some types of capital expenditure. Like other expenses, these are deducted in working out taxable rental business profits or added to any loss.
A balancing adjustment may arise when the taxpayer sells an item on which capital allowances have been given, or gives it away or stops using it in their business. This aims to line up the allowances given with the actual depreciation of the asset. Balancing charges (recovery of allowances) are treated as part of the income of the rental business. Balancing allowances (further allowances) are treated as an expense of the rental business, like other capital allowances.
Grants towards capital expenditure are normally deducted in arriving at the amount onwhich capital allowances are due.
There are capital allowances for certain expenditure on:
- Plant and machinery, but not, generally, assets in residential accommodation. Plant and machinery covers assets like vehicles, tools, ladders, computers, business furniture, furnishing and fittings, lifts, central heating and air-conditioning which belong to the taxpayer and are employed or let in the rental business. The allowance is a 25% reducing balance writing-down allowance; see below for more about residential accommodation - PIM3010.
- Industrial buildings and structures. This covers factories as well as a range of other types of building. The allowance is a 4% straight line writing-down allowance - PIM3020.
- Agricultural buildings and works. The allowance is a 4% straight line writing-down allowance - PIM3030.
- Hotels. The allowance is a 4% straight line writing-down allowance - PIM3040.
In all the cases listed above there are detailed rules governing which type of asset qualifies. For example, only hotels which meet certain conditions get an allowance. In nocase are allowances due on the cost of land or interests in land.
A ‘reducing balance’ allowance is one where the percentage is applied each year to the remaining balance of unrelieved expenditure. For example, if a taxpayer spends £1,000 on plant or machinery, they normally get 25% of £1,000 (£250) in the first year. In the second year they get 25% of £750, which is £188; and so on. A ‘straightline’ allowance is one where the allowance is the same every year until the expenditure has all been relieved. For example, if a taxpayer spends £1,000 on an industrial building, they normally get a fixed allowance of £40 each year for 25 years.
An allowance of 100% is available for expenditure incurred on constructing industrial and commercial buildings in a few, fairly small, parts of the UK called enterprise zones under a contract entered into during the life of the zone. These zones each have a life of ten years and most have now ceased. Not only is the rate of allowance very high (100%) but itis due on a wider range of assets. That is, not only do industrial buildings and structures and qualifying hotels get the 100% allowance but also certain commercial buildings and structures (like offices and shops).
Capital allowances are not due on the cost of houses, flats and other residential accommodation apart from agricultural buildings allowance. Nor are they due on most kinds of commercial building outside enterprise zones, including shops and offices. Some warehouses may qualify for industrial buildings allowance and some will not, it depends on the exact nature of the use.
A flat conversion allowance was introduced by FA01. It is intended to encourage the conversion of empty or underused space above shops and other commercial premises to residential use. See CA43100 onwards.
Allowances for plant and machinery (such as cars or vans) are subject to the ‘wholly and exclusively’ rule (PIM2010). Allowances on cars costing more than £12,000 are restricted. See CA23500 onwards.
There are higher allowances for environmentally beneficial and energy-saving plant and machinery. See CA23110 onwards.
Plant and machinery capital allowances are not available on any furniture and equipment supplied with residential accommodation that is let furnished. Instead a ‘wear and tear allowance’ or ‘renewals allowance’ may be available, see PIM3200. The position is different for furnished holiday accommodation, see PIM4100.
Hire purchase and capital allowances
If a taxpayer buys plant and machinery on hire purchase, they may be able to claim capital allowances on the capital element in the hire charges. The interest or other charges counts as a normal business expense, see PIM2100 onwards.