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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.