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What Is A Capital Allowance For Commercial Property?

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As a commercial property expert in the UK, I often get asked about capital allowances and how they can benefit owners of commercial properties. Capital allowances are a valuable tax relief that can help property owners to reduce their tax liabilities and improve their cash flow.

In this article, I’ll explain what capital allowances are, how they work, and how you can claim them on your commercial property.

Table of Contents

What are Capital Allowances?

Capital allowances are a form of tax relief that allows commercial property owners to claim a deduction for the cost of certain assets used in their business. These assets include things like plant and machinery, fixtures and fittings, and even some types of building work.

The idea behind capital allowances is to encourage businesses to invest in new equipment and facilities, which can help to stimulate economic growth and create jobs. By allowing businesses to claim a tax deduction for these investments, the government is effectively subsidising the cost of these assets.

How Do Capital Allowances Work?

When you purchase an asset for your commercial property, such as a new air conditioning system or a set of office furniture, you can claim a capital allowance on the cost of that asset. The allowance amount will depend on the type of asset and how long it is expected to last.

For example, if you purchase a new computer for your business, you may be able to claim an annual investment allowance (AIA) of up to £1 million in the year of purchase. This means that you can deduct the full cost of the computer from your taxable profits in that year.

If the asset is expected to last for more than one year, you may be able to claim a writing-down allowance (WDA) instead. This allows you to claim a percentage of the cost of the asset each year over a set period of time. The percentage will depend on the type of asset and how long it is expected to last.

What is a capital allowance for commercial property
If you own a commercial property, there are several ways you can claim capital allowances to reduce your tax liabilities.

Claiming Capital Allowances on Commercial Property

If you own a commercial property, there are several ways you can claim capital allowances to reduce your tax liabilities.

Here are some of the most common types of capital allowances for commercial property:

  1. Plant and Machinery Allowances: Plant and machinery allowances can be claimed on a wide range of assets used in your commercial property, including heating and ventilation systems, lifts and escalators, and even some types of building work. The amount of the allowance will depend on the type of asset and how long it is expected to last.
  2. Fixtures and Fittings Allowances: Fixtures and fittings allowances can be claimed on items that are fixed to the building, such as bathroom suites, kitchen units, and built-in furniture. These allowances are claimed separately from plant and machinery allowances, and the amount of the allowance will depend on the type of asset and how long it is expected to last.
  3. Structural and Building Allowances: Structural and building allowances can be claimed on the cost of constructing or renovating a commercial property. This includes the cost of foundations, walls, and roofs. The allowance is claimed at a rate of 3% per year over a period of 33 years.
  4. Enhanced Capital Allowances: Enhanced capital allowances are available for certain types of energy-saving and environmentally friendly equipment, such as solar panels and low-emission vehicles. These allowances allow you to claim a 100% deduction for the cost of the asset in the year of purchase.

What does 100% capital allowance mean?

Picture this: you’re a small business owner looking to upgrade your company car to a new electric vehicle. You’ve heard about the impressive tax benefits, but you’re not sure whether to opt for a Personal Contract Purchase (PCP) or a Hire Purchase (HP) agreement. This is where understanding the differences between these two finance options becomes crucial.

Let’s start with the PCP agreement. You’re attracted by the lower monthly payments and the flexibility to either purchase the car or return it at the end of the term. However, there’s a catch when it comes to claiming capital allowances. Under a PCP agreement, the deposit and monthly payments are not eligible for capital allowances each year. The only amount that can be considered for capital allowances is the balloon payment at the end of the term, and even then, only if it meets the strict conditions outlined in Section 67 of the Capital Allowances Act 2001. In other words, you would miss out on the generous 100% first-year allowance.

Now, let’s consider the Hire Purchase agreement. If the agreement meets the conditions of Section 67, it allows businesses to claim the full cost of the electric vehicle as a deduction from profits before tax, all in the first year of purchase. This is a game-changer for businesses looking to reduce their tax bill and improve cash flow.

Imagine the satisfaction of knowing that by opting for a Hire Purchase agreement, you’re able to take advantage of the 100% first year allowance, significantly reducing your tax liability for the year. It’s a smart financial decision that can help your business thrive.

Of course, every business is unique, and there’s no one-size-fits-all solution when it comes to tax planning. That’s why it’s always recommended to consult with a tax advisor who can provide tailored advice based on your specific circumstances.

What can I claim 130% capital allowances on?

As a business owner, trying to make sense of all the different capital allowances available can be a right headache. But what if I told you that there’s a brilliant opportunity waiting for you, one that could significantly boost your tax savings and help your business thrive? Let me introduce you to the Super Deduction, a powerful tax incentive that’s been making waves in the UK business community.

Picture this: you’re the proud owner of a manufacturing company, and you’ve been eyeing up a shiny new piece of machinery that could revolutionise your production process. You’ve done the maths, and you know that this investment could take your business to new heights. But there’s just one problem – the cost. That’s where the Super Deduction comes in.

According to the UK Government’s Super Deduction Factsheet, businesses like yours can claim a whopping 130% capital allowance on qualifying plant and machinery expenditures made between 1st April 2021 and 31st March 2023. Let that sink in for a moment. For every pound you spend on eligible assets during this period, you can claim a deduction of £1.30 against your taxable profits. It’s like the government is handing you extra money to invest in your business!

Let’s say you decide to take the plunge and purchase that state-of-the-art machine for £100,000. Under normal circumstances, you’d only be able to claim a portion of that cost as a capital allowance each year, gradually reducing your taxable profits over time. But with the Super Deduction, you can claim a staggering £130,000 deduction in the very first year. That’s an extra £30,000 in tax savings, straight into your pocket.

But the benefits don’t stop there. Imagine you’re a construction firm looking to expand your fleet of vehicles. You’ve had your eye on a new fleet of electric vans, but the upfront cost has been holding you back. With the Super Deduction, you can claim that 130% capital allowance on each and every one of those vans, as long as they meet the qualifying criteria. Suddenly, that eco-friendly fleet upgrade seems a whole lot more affordable.

Of course, as with any tax incentive, there are some rules and regulations to comply with. That’s where seeking expert advice can really pay off. A knowledgeable tax advisor can help you identify which assets qualify for the Super Deduction, ensure you’re claiming the maximum allowances possible, and keep you on the right side of HMRC.

How to Maximise Your Capital Allowances?

Claiming capital allowances on your commercial property can be a complex process, and it’s important to get professional advice to ensure that you are claiming all the allowances you are entitled to. Here are some tips for maximizing your capital allowances:

  • Keep Accurate Records: To claim capital allowances, you will need to keep accurate records of all the assets you have purchased for your commercial property, including receipts and invoices. Make sure you keep these records up to date and in a safe place.
  • Claim Allowances Every Year: Capital allowances can be claimed every year, so make sure you are claiming them on your annual tax return. If you miss a year, you may be able to carry the allowance forward to future years, but it’s always best to claim them as soon as possible.
  • Plan Your Purchases Carefully: When purchasing assets for your commercial property, it’s important to plan carefully to maximize your capital allowances. For example, if you are planning a major renovation or refurbishment, it may be worth splitting the cost over several years to take advantage of the annual investment allowance.
  • Consider the Timing of Your Purchases: The timing of your purchases can also affect your capital allowances. For example, if you purchase an asset just before the end of the tax year, you may be able to claim the full allowance in that year, rather than having to wait until the following year.

Selling Your Commercial Property

If you are planning to sell your commercial property, it’s important to consider the impact of capital allowances on the sale price. When you sell a property that has had capital allowances claimed on it, you may be required to pay back some of those allowances to HMRC.

This is known as a balancing charge, and it can have a significant impact on the sale price of your property. It’s important to factor this into your negotiations with potential buyers and get professional advice on minimising the impact of any balancing charges.

Alternatively, if you are looking to sell your commercial property quickly and with minimal hassle, you may want to consider selling to a specialist buyer like Property Saviour. As experts in commercial property, we can provide you with a fast, fair, and hassle-free sale.

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