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VALUE YOUR ASSETS !
Understanding the rules of the Annual Investment Allowance could entitle you to tax relief
The Annual Investment Allowance ( AIA ) is a way to claim corporation tax ( 19 % for 18 / 19 ) relief on assets that your business buys , to a current limit of £ 200,000 for each year . This means if you buy certain assets , you can deduct some or all of the value of the item from your profits before you pay tax .
So , what is the difference between an asset and an expense ? An asset is something tangible that belongs to your business and has an ongoing value beyond a year . An expense is money that you spend on something that typically doesn ’ t last beyond a year , such as rent , stationery , travel tickets or insurance .
If you think you are going to reach your £ 200,000 limit in one year , it may be worth delaying further capital expenditure until the following year . Otherwise , any qualifying expenditure over and above the £ 200,000 AIA will only attract a Writing Down Allowance of 18 % per annum for general plant
Look out for opportunities for tax relief when you ’ re maintaining a property
When you are a landlord , rental profits will be taxed at the standard UK income tax rates . Rental profits are the rental income less any expenses that are incurred ‘ wholly and exclusively ’ for the purpose of letting out the property . Examples would be letting agents ’ fees and commissions , repair expenses ( not improvements ), insurance , phone calls , stationery and travel .
REPAIR OR IMPROVEMENT ? If a tenant reports a broken kitchen cupboard door and the landlord arranges for it to be repaired , that is a repair that can be deducted as an expense . If the landlord refurbished the whole kitchen to the same standard that could also be an expense , as the replacement is ‘ like for like ’ and not an upgrade .
If the landlord replaces and upgrades the whole kitchen , that would be an improvement cost enhancing the value of the property and cannot be claimed as an expense , but records should be maintained and offset against any capital gains tax calculations on sale of the property . A grey area would be replacing single glazed windows with double glazed . As double-glazed windows are now standard , that would not be seen as an improvement .
REPLACEMENT DOMESTIC ITEMS RELIEF In the 16 / 17 tax year , HMRC removed the 10 % wear and tear allowance . This was replaced by a ‘ replacement domestic items relief ’, so landlords can deduct the actual costs of replacing certain items . This would cover items that are not a part of the property such as stand-alone white goods , furniture , furnishings , televisions and kitchenware . This expense is limited to the cost of a like-for-like item , and anything over and above that is not allowed .
and machinery in the main pool or 8 % in the special rate pool .
Once you have identified the cost as an asset , how do you know if HMRC will allow you to claim it as the AIA ? HMRC capital allowances manual states that AIA qualifying expenditure must be :
• expenditure on the provision of plant or machinery wholly or partly for the purposes of a qualifying activity that the person incurring the expenditure carries on , and
• the person incurring the expenditure owns the plant or machinery as a result of incurring the expenditure
Exceptions where you can ’ t claim the AIA for a year are : if you are about to close down your business permanently , you are buying a car , you have received the asset as a gift or it was acquired for purposes other than the business , you lease the items , or the items are only used for business entertainment . ( So that bucking bronco may not be such a fun purchase for the office after all !)
You can , however , claim on items such as machines , computers , vans and integral features of a property ( but not the actual building , doors , gates or shutters !).
Landlords ’ key to PROFIT
INTEREST RATE RELIEF RESTRICTION From 2017 / 18 , there are changes to the amount of interest on property loans that can be claimed as an expense for residential property . The scale below shows how much of the interest expense is subject to restriction :
16 / 17 : 0 % 17 / 18 : 25 % 18 / 19 : 50 % 19 / 20 : 75 % 20 / 21 : 100 %
The amount subject to restriction will attract basic rate tax reduction ( 20 %) on whichever is lower – the interest subject to restriction , the property income for the year , or adjusted total income ( total income less savings and dividends less personal allowance ).
The rules on property taxation can sometimes be confusing and are often changing , so please get in touch if you would like assistance in reviewing your own situation .