The last non-resident landlord income tax return was filed for the period ending April 2020, with the regime now under UK corporation tax. With the impending tax rates increasing to 25% it is inevitable property investors will be paying more tax, not only on rental income, but also on the profit on a future sale of their property. Previously no capital gains tax on disposal was required.
However, unbeknown to many investors they are likely to be sitting on significant unclaimed capital allowances within their existing portfolio which can be used to mitigate the future increased tax liabilities.
Often non-resident landlords have not claimed capital allowances as they were of little benefit. However, the change in tax regime now presents an opportunity to investigate potential claims on historic expenditure within the current portfolio including the original acquisition and subsequent capital spends, as well as capturing any 130% super deduction on new expenditure.
Plant and Machinery Allowances can be disclaimed in both pools and carried forward for future use. Delaying a claim to the year of disposal will only allow the taxpayer to claim 1 years of writing down allowance, rather than each year since expenditure.
For example, an investor disposes of a property, and after other deductions has a profit subject to corporation tax of £1million and a tax liability of £250,000.
Claiming £1million of historic plant & machinery allowances at the current 18% reducing balance basis will reduce the taxable profit by £180,000 in year 1, saving £45,000 based on a 25% tax rate.
However, assuming the 18% plant and machinery allowances are disclaimed and carried forward over say 5 years prior to disposal, the total accumulated allowances will be £629,260, providing a tax saving £157,315, over three times the saving compared to only identifying the allowances in the year of disposal.
Whilst you can claim on expenditure going back as many years as you want, as long as that asset is still being used in the course of your trade, there is a 2 year time limit for amending previous tax returns. However, if you hold the property for another 3 years you will have 5 years of benefit as per the example above. On disposal of the asset you must agree with the purchaser the correct contract wording and CAA2001 198 election to retain the benefit of plant and machinery allowances.
Additionally, on new expenditure, even where an entity may not be in a tax paying position it is still beneficial to claim the allowances in year of expenditure, use the first year reliefs available, and potentially increase the losses thus deferring the time in the future when tax will need to be paid.
Please contact your usual Veritas team member to review any historic or new expenditure to investigate any unclaimed tax savings.