With the constant fluctuation in fiscal policy on the available tax relief for property expenditure, it can give rise to missed cash savings via Capital Allowance claims. In this briefing, we provide a reminder for businesses, investors and individuals as to what tax reliefs are available and their benefit.
- Plant and Machinery Allowances
Plant and Machinery (P&M) Allowances are the main form of tax relief claimable against certain qualifying fixtures. There are two forms:
- Main Pool – General P&M
- Special Rate Pool – Integral Features & Thermal Insulation
General P&M relate to assets which have a faster rate of depreciation, namely IT, furniture items etc. but also apply to building items such as fire alarm and security installations.
Qualifying expenditure is written down at 18% per annum on a reducing balance basis. For £100,000 of qualifying expenditure, you would claim £18,000 in year 1, with the residual balance of £82,000 carried forward. 18% is then taken in the subsequent period until that fixture is below £1,000 or has been sold or scrapped.
Integral Features are as the name suggests for those fixtures which are more integral to a building and have a longer depreciation life such as heating, main electrics, cold and hot water services. Thermal insulation is expenditure incurred improving the thermal performance of an existing building, such as new glazing or cladding.
Qualifying expenditure is written down at 8% per annum again on a reducing balance basis, although note this is to change to 6% from 1 April 2019 for corporates and 6 April for individuals.
- Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) are for fixtures which qualify either as being energy efficient or water saving technologies. The Carbon Trust set the criteria for which supplier’s products must satisfy in order for the expenditure to qualify.
The benefit is that the standard rates for P&M Allowances is accelerated to 100%, in the year of expenditure. The complexity is that the product must either be certified or a listed product on the energy technology list at the point the expenditure is incurred.
In the last budget it was however, announced that this allowance was to be abolished from 1 April 2020 and so for any planned expenditure which has the potential to be claimed for ECAs, the expenditure must be deemed unconditionally incurred before this date, to take the benefit of the 100% tax relief. After 1 April 2020, the normal rates of Capital Allowances will still apply.
- Structures and Buildings Allowances
Structures and Buildings Allowances (SBAs) were announced in the last budget and provide a straight line 2% rate of tax relief over 50 years on any new qualifying expenditure. The normal P&M allowances will be claimed as before, with the SBA taken on qualifying expenditure not already receiving tax relief. This will also include some associated professional fees and any demolition costs, but will not include all expenditure, for example planning or general landscaping costs would not qualify.
Therefore, a process of data capture will be required and the need to abstract normal P&M expenditure before capturing the qualifying SBA expenditure.
Unlike for normal P&M allowances, to the extent SBAs are claimed it will reduce the base cost for when the capital gain tax position is calculated on sale.
SBAs automatically pass over to the next owner and so will require a record of when the SBA 50 year life started and the value to be passed across.
- Research and Development Allowances
Research and Development Allowances (RDAs) are for expenditure on fixed assets which are to be used wholly or partly in an R&D qualifying activity. The benefit is that the total building expenditure will qualify for 100% tax relief in the year of expenditure, unlike SBAs which are claimed over a 50 year period.
The key is to firstly identify whether the building is to be put to a qualifying use and this is seen as an activity which is innovative or new to science.
Even where the activity is confined to part of a larger property, the legislation allows a pro rata approach, likewise where a space has mixed users, it is possible to apply a time apportioned approach to claim a portion of the total building cost as qualifying for RDAs.
- Land Remediation Relief
Land Remediation Relief (LRR) is not a form of Capital Allowance, but relates to property and land expenditure, providing tax relief to clear any contamination in the land or buildings, such as asbestos, gas, underground oil tanks and Japanese knotweed.
The benefit is that it provides 150% tax relief and is available to both investors and developers, with the latter taking the original cost as a development expense and an additional 50% as qualifying for LRR.
There are several restrictions which have to be checked, for example the claimant cannot be the contaminator or connected to and must be subject to UK corporation tax. It is worth noting that from April 2020 when non-resident landlords are to be brought fall under the corporate tax regime, they too will then be able to claim LRR, but not for past expenditure incurred under the income tax regime.