Capital allowance

Capital allowances can be crucial on the purchase of a building which comes with second-hand fixtures assuming various conditions which allow for the claim to be made are met. Typically, this includes hidden expenditure on elements such as air conditioning, wiring, heating, lighting and security systems – essentially everything that would remain in the building if you tipped it upside down! Failing to meet the conditions prior to a transaction could turn out to be costly (up to 100% of the value of the assets) as it could prevent any relief for the purchases post-acquisition.

The availability of capital allowances to a purchaser are conditional on the pooling of relevant expenditure prior to a transfer, the seller and purchaser formally agreeing on a value for fixtures within two years of a transfer and an election under CAA01/S198 or S199 being made in writing.

The ‘fixed value requirement’ is met by the past owner and current owner formally agreeing on a value for the fixture within two years of the transfer, or by commencing formal proceedings within that time to agree on the value, or in certain circumstances by written statements being supplied.

The ‘disposal value statement requirement’ applies in exceptional circumstances and is met by the past owner providing a written statement, within two years of his cessation of ownership, of the amount of the disposal value of fixtures which he had some time earlier been required to bring into account (for example, when he permanently ceased his business).

An election under CAA01/S198 or S199 must be made by notice in writing to HMRC.

It should contain the following information:

  • the amount fixed by the election
  • the name of each person making the election
  • information sufficient to identify the plant or machinery fixture and the relevant land,
  • particulars of the interest acquired by or the lease granted to the purchaser
  • the Unique Tax Reference number (UTR) of each of the persons making the election, or confirmation that the person does not have a UTR.

The election is irrevocable.


Landlords’ replacement wear & tear allowance

Capital allowances are not available for expenditure on furniture and furnishings for use in dwelling houses. However, until 5 April 2016 (1 April 2016 for corporation tax) a deduction for wear and tear may be claimed (known as a ‘wear and tear allowance election’), equal to 10% of the ‘net rents’ from furnished lettings (ie after deducting payments that would normally be borne by the tenant, such as water rates). In addition, a deduction may be claimed for replacing fixtures that are an integral part of a building (eg central heating systems), but excluding additional expenditure on ‘improved’ versions of those items. However, replacing single glazed windows with double glazed units is treated as allowable repairs and not disallowable improvements.

Many flats are let unfurnished due to the difficulties of complying with fire safety legislation.

In relation to expenditure incurred on or after 1 April 2016 (for corporation tax) and 6 April 2016 (for income tax), the former wear and tear allowance for fully furnished properties will be replaced with a relief enabling all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The new relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

The amount of the deduction is:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
  • the incidental costs of disposing of the old item or acquiring the replacement; less
  • any amounts received on disposal of the old item.

This deduction will not be available for furnished holiday lettings as capital allowances continue to be available for them.

Note also that the renewals allowance for tools (under ITTOIA 2005, s 68) will no longer be available for property businesses from the same date.