Capital allowances and property

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Landlords of residential property are at a disadvantage when it comes to claiming capital allowances on plant and machinery. Plant in a ‘dwelling house’ does not qualify for capital allowances. It is, however, still possible to claim capital allowances on plant installed in common areas.

Common areas, for example, in a block of flats.

Commercial property landlords suffer from no such restrictions and can claim capital allowances on the cost of any plant and machinery they install.

The rates of capital allowances vary according to thetype of the plant. Most items of  plant qualifies for a ‘writing down allowance’ at a rate of 20% per year – which will reduce to 18% from April 2012, but certain items which are ‘integral’ to a building only qualify for a lower rate of 10% – reducing to 8% from April 2012.

‘Integral’ plant includes:

  • Electrical systems
  • Cold water systems
  • Systems for heating, ventilation, hot water, and air conditioning
  • Lifts, escalators, and mechanical walkways
  • External solar shading

Annual Investment Allowance (AIA)

Any of the above types of plant, qualify for the Annual Investment Allowance (AIA), which gives tax relief for 100% of expenditure on plant and machinery up to a limit of £100,000 for the year. This limit is also being reduced in April 2012, to a mere £25,000, so if you were thinking of spending substantial amounts of money on plant in your building, now is the time.

A word of warning to limited companies – if your accounting period does not end on 31 March, the allowances are time apportioned. The details are complicated and you might want to take advice on this, particularly if it going to affect your decision on spending.

Most plant installed in a building is likely to be ’integral‘ as defined above, but with the AIA allowance, in many cases the expenditure will be covered by the AIA and will never be subject to the lower rate of writing down allowance.

Additional costs to claim!

The costs of transporting the plant to your building, and of installing it, are considered part of the cost of the plant, and can thus qualify for the AIA.

Also included is the cost of alterations to an existing building which are done for the purpose of installing plant and machinery. For example, if  installing a lift in a building, the cost of the lift shaft – including the bricks and mortar – can be treated as part of the cost of the lift itself, and thus will qualify for the AIA.

Note that this only applies when altering an existing building, not constructing a new one. If installing plant and machinery involves an extension to an existing building, you might be able to show that the alterations were ‘incidental’ to the installation of the plant and machinery. ‘Incidental’ has been defined asbeing required in order to install the plant. Liaise with your architect, builder, and quantity surveyor to ensure that all relevant expenditure is identified, the plans and the invoices should indicate those works that were ‘incidental’ to the installation. An appropriate proportion of these professionals’ fees can also be treated as part of the cost of the plant.

Act now, it may soon be too late!

If you purchased a building, together with plant, and have never claimed for the plant, you can still make a claim. However, the government started a consultation process in May 2011 on whether to continue to allow capital allowances claims on purchases of commercial property regardless of the purchase date. As the legislation stands at the moment a claim may be made for qualifying “plant and machinery” within the property with no time limitations applied as to the date of purchase.

It would seem that the government have realised, if the current regime continues, it will potentially be vulnerable to the loss of millions of pounds through tax rebates and reduced tax income. Given the  state of the public finances,  the UK the government wants to retain as much money in HMRC’s tax take as possible.

If the Government does manage to reduce how far one can go back in making a capital allowances claim then many owners will have lost out without ever realising it. Many landlords of homes in multiple occupation (HMO’s) have already lost out, to a great extent, due to changes that HMRC introduced in October 2010 as will many owners of furnished holiday lets (FHL’s) if they do not review how recent changes have affected their rights to make a capital allowances claim.

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Property purchases to go on HMRC database

Later this year your solicitor, or property conveyance person, will be required to file new forms with the Stamp Duty Land Tax Office when you buy a property.  The regulations allow old forms to be used, or the new forms, from 1 April 2011 to 3 July 2011. After 4 July 2011 only new forms can be filed.

No cause for alarm thus far.

Unfortunately the devil is in the detail!

The new forms require that each lead purchaser provide the following unique identifier when completing the forms:

  • Individuals – their National Insurance number, or
  • Companies and Partnerships – their Unique Tax Reference (UTR) or VAT registration number.

Wonder what HMRC will do with this additional information? No doubt they already have, or will be, setting up tracking processes that link property purchases to the lead purchaser’s tax file.

Tax refunds on holiday property

If you have a commercial furnished holiday let within the EU, then there is potential for a tax refund.

Did you know up to 30% of the purchase price of a furnished holiday letting may be eligible for capital allowances? If these allowances are higher than your profits from rental income, any excesses may be set against tax payable on general income such as salary or business profits. There is a limited window of opportunity to make use of this “set off”, or sideways loss relief, as it will only be available until 5th April 2011.
Capital allowances are available on plant and machinery such as fitted kitchens, plumbing, central heating, loose furniture, and equipment.

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How it works
Typically, the level of plant and machinery is between 10 and 30% of the purchase price of the property, for example:

On a £500,000 property in Spain, the potential allowances are up to £150,000 made up of heating system, swimming pool, sanitaryware and electrics, amongst many others

This would translate to a total tax saving of £75,000 for a 50% tax payer!

What conditions must you satisfy?
The property must be in the UK or in the EU
The property or properties must be run on a commercial basis
Available to let for 140 days per year, and actually let for over 70 days per year
Not let to long term tenants for over 155 days per year
Long term letting is to the same person for over 31 days

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Company Car Tax

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The taxable benefit on the use of company cars and fuel for those vehicles has increased from 6 April 2010. Take for example a petrol-powered car with CO2 emissions of 160g/km. In the tax year to 5 April 2010 you were taxed at 20% of the vehicle’s list price. From 6 April 2010 the taxable benefit for driving the same car will be 21% of its list price.

The tax position for those who have free fuel with their vehicles is even worse. Until 5 April 2010, the value of the fuel-benefit for all company cars was based on a fixed value of £16,900 multiplied by the percentage used to calculate the car benefit. So there is an increase in both the percentage and the multiplier. From 6 April 2010 the value increases to £18,000. This means the taxable benefit of having free fuel for a petrol car with emissions of 160g/km will increase from £3,380 to £3,780.

Company van drivers are also hit by the rise in the fuel benefit. Currently where free fuel is provided in a company van, and the van is used for some non-business journeys, the driver is taxed on £500 per year for the use of that fuel. From 6 April 2010 the van driver will be taxed on £550 per year for use of the fuel.

You can reduce these high tax charges by switching to a low emissions car. Where the CO2 emissions are 120g/km or less the car benefit for petrol cars is just 10% of the list price, and half that amount where CO2 emissions are 75g/km or less. We could only find one car with emissions in that bottom category: Toyota plug-in Prius, which has an official CO2 emissions rating of only 67g/km.

If your vehicle has zero emissions such as an electric car or van, there is no tax charge at all from 6 April 2010. What’s more, when your business buys a new electric vehicle it can write-off the full cost for tax purposes in the year of acquisition.

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Property tax update

Business Rates
Business rates became due on most vacant business property from 1 April 2008 when previously such properties were exempt from rates. In last year’s Pre Budget report the Chancellor announced an exemption from business rates for empty properties which had a rateable value of less than £15,000, but only for the 2009/10 financial year.This exemption is now to be extended for the year to 31 March 2011, and boosted to include empty properties with a rateable value of less than £18,000.

Stamp Duty
A stamp duty ‘holiday’ was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. The lower threshold (£125,000) will apply once again from 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.

SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date. To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.

CGT on Homes
There is a relaxation of the rules on principle private residence relief where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.

Furnished Holiday Letting

Tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.

the impact is:-
Losses – future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
Pensionable income – from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
CGT – the capital gains relief associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010. Consider a disposal to a trust or family member before this date.

IHT – the business property relief exemption on property will cease to apply from 5 April 2010

Owners of FHL property are currently treated as traders and the income, losses and gains on sale are potentially available for a number of tax advantages compared to non-FHL property owners. These advantages include:

  • Profits are deemed to be trading income and are taken into account for pension purposes
  • Certain capital expenditure will qualify for the Annual Investment Allowance. (100% tax deduction)
  • Losses are deemed to be trading losses and available to set off against any other income of the owner(s).
  • Gains on sale may qualify for rollover relief and entrepreneurs’ relief.

For 2009-10 and certain earlier years, property owned in the EEA (European Economic Area) was included as FHL property as long as the usual qualifying conditions were met. This was announced in the 2009 Budget.

It is also worth mentioning that FHL is not treated as trading for all tax purposes. For example, there is no special treatment for business property relief for inheritance tax purposes. Generally speaking FHL will not qualify for business property relief unless part of an enterprise incorporating other facilities.

What to do?

If you are contemplating the sale of FHL property it may make sense to complete the transaction before the present capital gains tax concessions expire on the 5 April 2010. Potentially the gain on the sale may qualify for Entrepreneurs’ Relief. This could reduce your tax on any gain to just 10%, as long as the sale meets the required criteria.

If you are a long term investor and have no intention of selling, you could consider bringing forward any capital expenditure that may qualify as part of your Annual Investment Allowance. For 2009-10 you are allowed to claim a 100% deduction for expenditure up to £50,000. If this claim either created or enhanced an overall loss, you could set off the loss against your other earnings and reduce your liability for 2009-10. (You may also be able to carry losses back if this is more advantageous.)

Planning pointer.

If you own FHL property, now would be a good time to take a hard look at the tax planning advantages that are still in date. As soon as we cross the 5 April 2010 threshold all the present options are lost! Please call if you would like more information on this topic.

Business rates – new rateable values

Every business with property should during October 2009 have received their new business rates valuation. This valuation will form the basis of business rates for the next five years.

It is very important to check the detail of the new valuation to make sure that the rateable value applied to your property is correct. The rateable value is determined by a number of factors primarily the open market rental value on the valuation date. The valuation date for the 2010 changes is 1 April 2008. We are aware of cases where business rates have been reduced, following appeals on the basis that rental values have fallen.

Appeals against the new valuations should be submitted before the 30 November 2009. If you want to appeal your business rates, please feel free to phone for advice.

Business clients should also be aware that there are a number of specific reliefs that you may be able to claim to reduce your business rates – these include small business rate relief (England and Wales) and transitional relief. This isnt given automatically, so you must complete the form and claim it.

If you would like our assistance checking the valuation please call. The Valuation Office Agency (VOA) website can be accessed at www.2010.voa.gov.uk/rli/en/basic and has a number of useful FAQ sections.

Sale of property that has been held for letting

We all know the property market has been through terrible times lately. Some businesses, set up in the good times to invest in let property for the long term, have been forced to sell some property to generate  funds to cover ongoing costs.

Where a property investment business starts to develop properties for sale, rather than keeping them for long term letting, the business has started a trade of property development.

So a property, previously held as an investment, is transferred to “stock” , meaning it is now stock being made ready to be sold, then that property must be treated as if it had been sold at its open market value at that point.

This can create a capital gains tax charge, or a capital loss, before the property has actually been sold.

To avoid this problem the business owners can make an election to treat the value of the property when it enters stock, as the value when it was acquired by the business. Any gain or loss will then only arise when the property is eventually sold by the business. This election must be sent to the tax office within two years of the end of the accounts year for a company, or by the first anniversary of 31 January following the tax year end for an unincorporated business.

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Besides the timing issue, the advantage of making this election is that the loss, if one arises, becomes a trading loss made on the sale of stock by the business rather than a capital loss. Generally a trading loss can be set-off against a wider range of income than a capital loss. However, to use this trading loss the Taxman will have to be convinced that the property business has actually started a trade of property development, and is not simply selling off its surplus investments.

This can be a very difficult area and full advice is essential so please contact us for advice in your own circumstances.

A beginners guide to ‘flipping’ a second home.

LONDON, ENGLAND - MAY 23:  A 'Government of th...

We have all seen and heard comments in  the  media  about  MPs “flipping” their properties in order to avoid capital gains tax on selling their  second  homes.

You might be wondering what does this mean? And is this a game  anyone  with  more  than  one “residence”  can  play? …read on

The hysteria has surrounded the facts that

  • MP’s have been able to purchase a second property with a mortgage of up to £300,000 funded by the taxpayer, then ‘flip’ to avoid or minimise the capital gains tax payable.
  • Some MP’s have nominated one property as their second home for House of Commons expenses purposes, and a different home as the second home for CGT purposes.

Lets start with some basic rules

  • You are exempt from CGT on a gain from selling your  “main  residence”,  and you  can  only  have  one  main  residence  at  the same time.

  • If you are married or in a civil partnership, you can only have one main residencebetween the two of you.

  • The one  exception  to  this  rule  is when a property has been your main residence at any time during your ownership of it, in which case exemption extends to the last 36 months before you sell it, even if in fact you have another main residence during that period.

The purpose of this exception is to make some allowance for the fact that you may need to buy a new home before you manage to sell the old one. Certainly a consideration in todays marketplace.


When you have more than one “residence”, the law allows you to nominate which one is to be treated as your “main residence” for tax purposes and so enjoy the exemption from CGT. You must do this within two years of having a choice, ie more than one residence.

Once you have made this nomination, by writing to the tax office that deals with your tax affairs, you can subsequently vary that nomination at any time in the future, and the variation can be backdated by up to two years. In the case of a married couple or civil partnership, both must sign the nomination and any subsequent variation.

For example:

Ian buys a holiday home in North Wales in December 2006. In January 2007  he writes to his tax office to make an election that his home in Stockport should be his ‘main residence’. In July 2009 he decides to sell the holiday home.

He writes to the tax office in July 2009 ‘varying’ the election making the North Wales property his main residence. Two months later, he writes again making the property in Stockport again the main residence. Because   the   North Wales property was   properly   nominated   as   his  “main residence” for a period (July and August 2009), the last 36 months of the gain are exempt from CGT.

The house in Stockport has a period of two months when it was not the ‘main residence’ and the eventual gain on the sale of this property will need to be time apportioned and the two month period will not be exempt. However, the chances are that the gain for such a short period would be covered by the annual exemption from capital gains tax, which most people rarely use.

It is important to make the election in the first instance, when two homes are available. If the election is not made, then there is no opportunity to vary it. If you have failed to make the election within the time limit, please do speak to us about the situation,  we can advise on the options available.

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Furnished Holiday Let Property – abolished

The EU seems to have caused a problem for the Chancellor. As a direct result of EU rulings the UK has been compelled to extend the various tax advantages of ‘Furnished Holiday Lettings’ status to properties located within the European Economic Area (EEA) – as long as they meet the required qualifying criteria.

Clearly the UK Treasury were very unhappy with this, and in his April 2009 budget the Chancellor announced that the entire Furnished Holiday Lettings tax legislation is to be repealed and withdrawn with effect from 6 April 2010.

What difference will this make?

Obviously if you presently rent out accommodation as a qualifying holiday let in the UK it will make a big difference.

From the 6 April 2010 FHL property income will revert to being taxed as non-FHL property income. In a nut shell the downside tax effects after 5 April 2010 are:

  • you can no longer set of FHL losses against other income
  • you can no longer claim capital allowances for the purchases of furniture and equipment, and
  • you will lose significant capital gains tax reliefs including roll-over and entrepreneurs’ relief if you dispose of FHL properties after 5 April 2010.

  • you will lose the ‘Business Property Relief’ on FHL property, which means the property value will become chargeable to inheritance tax.

What are the opportunities?

As always change can have positive effects. We have listed a two below:

  • if you own a let property in the EEA, that would have qualified as a FHL property under the present rules, it may be possible to back date changes to your tax returns for 2007 and 2008. This would include set off of surplus FHL losses against other income.
  • if you have sold a property in the EEA that would have qualified for more favourable capital gains tax treatment, computations can be revised for the years ending 5 April 2007 and 5 April 2008.

What’s next?

If you feel that you may be affected by these changes we should meet and discuss as soon as possible. The most immediate deadline is to apply for a late change to your 2007 self assessment tax return if it needs to be changed; this has to be done by 31 July 2009. (If you have operated your FHL trade through a company, amendments to tax computations for accounting periods ending after 31 December 2006 have to be submitted by the same date, 31 July 2009.)

Selling property abroad

Sterling has depreciated considerably against the Euro in the last year. Whilst this is of great interest to other Euro zone residents, who can buy property in the UK at much lower Euro cost, the opposite applies to UK residents who have purchased property elsewhere in the Euro zone.

For instance a property in Spain costing 1.5m Euros purchased early 2007 would have required an investment of £1m sterling.

A similar property may currently be worth 1.1m Euros. This is a loss on your investment of 400,000 Euros. Common sense might argue that if you disposed of the property now, you would merely multiply the loss by the exchange rate prevailing when the sale completed? Unfortunately this is not the case!

Capital gains tax legislation dictates that you compare the sterling value of the purchase at the date of purchase, with the sterling value of the disposal at the date of disposal. In our example a property disposal today of 1.1m Euros converts to say £1.1m sterling.

Despite the property dropping dramatically in price – you have made a taxable gain of almost £100,000.

Fine you may say but what if you want to reinvest the proceeds in another property in the Euro zone? The sterling gain of £100,000 will cost you possibly £18,000 in UK taxes; that’s £18,000 less to invest!

So be wary. A loss on sale in a local currency can produce unwelcome tax liabilities when converted to sterling.