FAQ
Who is eligible to claim capital allowances in the UK?
Capital allowances are accessible to both property occupiers and investors. If you have recently invested capital in acquiring, constructing, or enhancing commercial properties as part of your portfolio and are liable for income tax or corporation tax, you likely have the opportunity to take advantage of capital allowances benefits. This allows you to potentially offset taxable profits with qualifying capital expenditure, ultimately enhancing your tax efficiency and reducing your tax liabilities.
What are embedded Capital Allowances – Capital Allowances explained?
Embedded Capital Allowances are a tax relief available to commercial property owners for qualifying capital expenditure incurred on fixtures and fittings within commercial properties. These allowances are particularly relevant when building, purchasing, leasing, fitting out or extending a commercial property because they allow for tax deduction against profits in the year on “embedded” expenditure within the commercial property, such as lighting, heating systems, and sanitary fittings. The amount you can claim will vary depending upon the property type.
The term “embedded” refers to these items being considered part of the property rather than movable assets. The relief is claimed through the Capital Allowances system and is calculated based on the original cost of qualifying items within the property.
For further reading, well, read on.
Qualifying expenditure can often be substantial, and these allowances can significantly reduce a business’s tax liability, providing a valuable incentive for investment in commercial property. It’s important for businesses to consider these allowances when acquiring or refurbishing properties to ensure they maximise their tax deduction opportunities.
What are Structures & Buildings Allowance?
The SBA is a type of tax deduction designed to incentivise investment in commercial property. Introduced by the UK government on 28th October 2018, it allows businesses to claim a tax deduction on the cost of constructing, renovating, or converting non-residential structures and buildings and is available on costs after expenditure on plant and machinery has been identified.
Below are some key features of the Structures and SBA:
Qualifying Expenditure:
Capital investment costs associated with the construction or renovation of commercial buildings and structures.
Expenditures related to converting existing buildings for commercial use.
Professional fees, such as architects’ and surveyors’ fees, directly associated with the project.
Ineligible Expenditure:
The cost of land or rights over land.
- Costs incurred in obtaining planning permission.
- Costs qualifying for Capital Allowances (CAs).
- Costs qualifying for Research and Development Allowances (RDAs).
- Costs already claimed through another allowance.
- Costs which you received a grant or contribution.
- Costs for landscaping or land reclamation.
Qualifying Assets:
The allowance applies to non-residential properties such as offices, retail spaces, factories, and warehouses.
Structures such as roads, bridges, tunnels, and water systems may also qualify.
Allowance Rate:
Introduced by HMRC initially at 2% per year on a straight-line basis, this was increased to 3%
of the qualifying expenditure annually from their taxable profits.
This is spread over a 33⅓ year period, reflecting the long-term nature of property investment.
In the first claiming period the 3% is applied on a pro rata basis of the number of days the property
is in use following completion of the works.
Claims:
Claims are made through the business’s tax return.
Detailed records of all qualifying expenditures must be kept to support the claim.
Commencement:
The allowance applies to construction contracts entered into on or after 29 October 2018.
For renovation or conversion, the work must commence on or after this date.
The allowance applies from the date the property is brought into use following completion of the works.
Transfer of Ownership:
If the property is sold, the remaining balance of the SBA is transferred to the new owner,
who can continue to claim the balance at the annual 3% allowance.
Conditions for Claiming:
The building or structure must be used for qualifying business purposes.
If the property ceases to be used for business purposes, the allowance will stop until it is put back into qualifying use.
An SBA Statement is required to be kept and updated annually detailing qualifying expenditure and allowance claimed.
Purpose and Benefits:
The primary purpose of the SBA is to encourage investment in commercial property by providing a tax incentive. This can help businesses reduce their taxable profits, thereby lowering their tax liabilities. It aims to support economic growth by making it more financially viable for companies to invest in infrastructure and commercial properties.
I lease a commercial property – can I still claim Capital Allowances?
Yes, you can claim Capital Allowances on a commercial property you lease, provided you meet certain conditions. Capital Allowances can be claimed on qualifying capital assets and expenditure, such as plant and machinery, which you own and use for business purposes. Here are some key points to consider:
Qualifying Expenditure:
Capital Allowances are available on the cost of acquiring or improving qualifying assets,
including plant and machinery, fixtures, and certain integral features like electrical systems, heating systems, and lifts.
Ownership of Assets:
You need to own the qualifying assets to to be entitled to claim capital allowances.
If you lease the property, you can claim the allowances on the assets you have installed and own,
even if they are part of the leased property.
Fixtures and Fittings/Plant & Machinery:
If you lease a property and install fixtures and fittings (e.g., lighting, air conditioning),
you can claim Capital Allowances on these items, as long as you own them and they are used in your business.
Landlord’s Contributions:
If the landlord contributes to the cost of installing plant and machinery,
you cannot claim Capital Allowances on the landlord’s contribution.
However, you can claim Capital allowances on the portion you funded.
Leasehold Improvements:
Expenditure on leasehold improvements can qualify for Capital Allowances if they involve the installation of qualifying assets.
Structures & Buildings Allowance:
Expenditure on leasehold improvements can also qualify for SBA as long as they don’t qualify for any other form of allowances.
Leasing a commercial property does not preclude you from claiming Capital Allowances.
You can claim on qualifying assets you own and use in your business, making it a valuable tax relief mechanism.
Always ensure you comply with the specific rules and seek professional advice if needed,
as always the devil is in the detail, especially where lease agreements are in place.
Will my accountant have already claimed embedded capital allowances?
There are different types of capital allowances both moveable and fixed. Whether your accountant has already claimed embedded capital allowances “depends” on several factors, including the specifics of your property, the nature of the expenditure, and the information you’ve provided to them.
Here’s a breakdown of the considerations:
### Factors to Consider
Property Type and Usage:
– Embedded capital allowances are almost entirely claimed for commercial properties rather than residential properties, except in certain circumstances like furnished holiday lets (which is due to change in April 2025).
Property Purchase and Records:
– If you’ve purchased the property, the capital allowances available would need to be identified at the time of purchase. Often, this involves a detailed survey or analysis.
Communication with Your Accountant:
– For your accountant to claim these allowances, they would need detailed information about the property and any qualifying expenditures. If you haven’t provided this information or discussed it with your accountant, it’s possible these allowances haven’t been claimed yet.
Accountant’s Expertise:
– Not all accountants are specialised in capital allowances. If your accountant is not experienced in this area, they might not have claimed these allowances without specific instructions or an external specialist’s input.
– As an example, if you purchase a second hand commercial property for £500,000 – it is extremely unlikely that it will come with an itemised list detailing “the electrics cost £30,000” or “the air conditioning cost £20,000” which is what an accountant needs to make a claim. This is why specialist Quantity Surveyors are required as they have the expertise to put values against these qualifying items.
Accountant’s Appointment Terms:
All accountants appointment terms are different and embedded capital allowances may be an additional service to the standard compliance or a service not offered in house.
We come across every scenario.
###Actions to Take
Review Past Tax Returns:
– Check with your accountant to see if embedded capital allowances have been claimed in previous tax returns.
Provide Detailed Information:
– Ensure your accountant has all necessary details about the property, including purchase documents, renovation costs, and other relevant expenses.
Specialist Involvement:
– Consider consulting a capital allowances specialist who can conduct a thorough review and ensure all eligible allowances are claimed.
Conclusion
To determine if embedded capital allowances have already been claimed, you should have a detailed conversation with your accountant and review past tax returns. If there’s uncertainty or a lack of detailed assessment, involving a specialist could help uncover and claim any unclaimed allowances.
Is it Capital Allowance or Capital Allowances?
Not the biggie you were hoping for…..
The correct term is “Capital Allowances.” They are defined in the Capital Allowances Act 2001 and there is not one reference to Capital Allowance (that we have found) in the entire Act – that was an interesting day!
There we go, Capital Allowances.
The only reason we have found to refer to them as Capital Allowance is a typo or for SEO purposes; people will often search for Capital Allowance Advisor or Surveyor because it sounds more likely to be correct to those amongst us who don’t call them Capital Allowances all the time.
How are capital allowances calculated?
Calculating capital allowances requires a detailed understanding of eligible assets and applicable tax deductions, which can greatly benefit businesses by reducing taxable profits and thus lowering their tax liability. This financial strategy is crucial for optimizing long-term growth and financial planning. Let’s consider an example from the pharmaceutical industry where a company extended and refurbished its laboratory space with a total investment of £13 million. The project consisted of an extension to the existing laboratory, and the accountant categorised the costs as follows:
Extension building works: £2,600,000
Extension fit-out works: £2,000,000
Existing laboratory refurbishment and fit-out: £7,000,000
New laboratory equipment: £1,400,000
The accounting team initially identified the cost of new laboratory equipment as part of the general pool for plant and machinery, valued at £1,400,000.
The expenditure was categorised in this manner:
General capital allowances pool for laboratory equipment and works facilitating equipment installation: £3,000,000
Special rate pool for specific installations like ventilation, electrics, insulation, heating, and water supply: £6,500,000
Structures and buildings allowances covering elements like foundations, walls, ceilings, and floors: £3,500,000
Using these classifications, the pharmaceutical company claimed substantial tax relief, including a 100% first-year allowance of £1,400,000 for new equipment, a 50% first-year allowance on the special rate pool expenditure, and a 3% annual rate under structures and buildings allowances for general building works, totalling a tax relief of £6,940,000 in that fiscal year. The remaining allowances will be utilised in subsequent years.