Carrying on from our previous article on repairs to let property, this article sets out guidelines for capital allowances on expenditure on let property. There are different tax rules depending on the type of property being let as below.
Residential properties - capital allowances on plant and machinery are not generally available on assets in residential accommodation. See our previous article on wear and tear allowance Tax relief on wear and tear of furniture – let property that may be claimed for furniture and equipment provided with a furnished residential letting.
Furnished holiday properties – capital allowances may be claimed on plant and machinery such as furniture, furnishings etc in the let property as well on equipment used outside the property (like vans and tools). This is because the letting of furnished holiday properties is treated as a trading activity provided certain criteria are met.
Commercial properties – capital allowances may be claimed on some items of plant and machinery if a commercial property is being let – like a shop, garage or lockup.
For the relevant type of property letting capital allowances are available for plant or machinery used or provided for use for the purpose of a rental business. Examples include:
- Fixtures in a let property
- Tools used for maintenance
- Office equipment used in running the rental business
- Vehicles
Capital allowances are calculated for a rental business as they are for a trade. Hence they are subject to the ‘wholly and exclusively’ rule and allowances on cars costing more than £12,000 are restricted.
Plant and machinery is not defined in the capital allowances legislation apart from ‘integral features’. There is legislation which details that most buildings, parts of buildings and structures are not plant and machinery and parts such as walls, doors, windows, mains services, waste disposal systems are specifically included as not being plant and machinery. Where items are not specifically mentioned in the legislation or guidance, HMRC will apply the following tests to the item:
- Is the item stock in trade?
- Is the item the business premises or part of the business premises (the premises test)?
- Is the item used for carrying on the business (the business use test)?
If the answers to 1 and 2 are no, and yes to 3, the item is plant.
The legislation also includes lists of assets that can be considered as plant and machinery but they would still need to pass the above tests. These included wash basins, sinks, sanitary ware, cookers, washing machines, sound insulation provided to meet the requirements of the qualifying activity, fire and burglar alarm systems, moveable partition walls etc.
Assets qualifying under the above rules would be eligible for the annual investment allowance and would go into the ‘main pool’ for capital allowances purposes attracting an annual writing down allowance of 18%.
Integral features were introduced in to the legislation to give allowances on the provision or replacement of main features such as electrical, cold and hot water systems. These assets are also eligible for the annual investment allowance but are included in a ‘special rate pool’ where the annual writing down allowance rate is lower than the main pool rate at 8%. The definition includes:-
- an electrical system (including a lighting system),
- a cold water system,
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
- a lift, an escalator or a moving walkway,
- external solar shading
If the expenditure on an integral feature represents the whole, or more than 50% of the cost of replacing the feature, either all at once or within any period of 12 months, such expenditure is treated as capital expenditure on the replacement of an integral feature for capital allowance purposes. The person incurring the expenditure is deemed to own the plant and machinery. If the expenditure is deemed to be capital then there can be no relief as an expense against the trading income from the qualifying activity.
This area of capital allowances on expenditure on features in a property is not well defined in the legislation. Please contact us if you require further advice concerning tax implications of let properties.
