Capital Allowance Wiped Out
Tax expert Steve Sims author of ‘Understanding and Paying Less Property Tax For Dummies’ explains to Property Hawk users how recent tax changes will impact on landlords of HMO properties who claim capital allowances on their properties.
Capital allowances allow landlords of HMO or multi let properties to ‘set off’ against any income stream against tax paid up to 5 years and 10 months previously. There is no time restriction to the claims.
They relate to:
heating and air-conditioning, lifts, wiring to fixed plant, switchgear, emergency lighting, fire alarm installations, sanitary fittings, hot water installation, carpets and removable floor coverings, fittings and furniture, demountable partitioning used for trade flexibility, firefighting equipment, mechanical door closers, security equipment, telecommunications installations, trade and information signs, vehicle control equipment, window cleaning equipment and assets used to create ‘atmosphere’ or ‘ambiance’ in a hotel, restaurant or public house.
Change to capital allowance regime
Shared house landlords can no longer claim capital allowances on their investment in a shock overnight rule change by HM Revenue and Customs.
Owners of houses in multiple occupation (HMOs) could claim these allowances up to midnight on Friday, October 22, 2010 – but on Monday, new guidance shifted the goalposts without warning.
Last week, HMO owners could claim tax-reducing allowances for spending on plant and machinery like heating systems, fire alarms, and white goods in communal areas.
The new guidance changes all that at a stroke and prohibits any claim for a tenant’s living space, which the rules extend to cover shared kitchens, bathrooms, and living spaces.
Effectively, the only areas that attract a claim now are halls, stairs, landings, and lobbies.
“In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but in difficult cases the question is essentially one of fact,” says the guidance.
£50,000 tax allowance disappears overnight
“A block of residential flats is not a dwelling house, although the individual flats in it will be dwelling houses. A lift or central heating system serving the common parts of a building, which contains two or more dwelling houses, will not comprise part of either dwelling house. A central heating system serving an individual residential flat does not however qualify for a plant and machinery allowance (PMA).
“Expenditure on a central heating system serving the whole of the building containing two or more dwelling houses should be apportioned between the common parts, which qualify for PMA, and the residential flats or individual dwelling houses, which do not.”
Any claim for PMA up to October 22 will be dealt with under the old rules, but any landlord who has an invoice dated October 23, 2010 or later misses out.
Claiming capital allowances allowed an HMO owner to write off up to £50,000 spending on PMA against taxable profits in the current tax year.
Of course, HMRC guidance is the taxman’s interpretation of the rules and is not binding in law, but issuing guidelines is HMRC’s way of drawing a ‘do not cross’ line in the sand challenging taxpayer’s to go to court to support their claims.