What are the Capital Allowances rules for rental businesses?
In this episode of Property Investing 101 we look at how your rental business is affected by Capital Allowance rules.
The rules around Capital Allowances for a rental business are essential for you to understand.
When you run any business, your day to day expenses are deducted from your income to work out your profit.
But assets such as tools and equipment which are kept in the business for many years, are generally written off over a period of time, often many years.
The cost of writing off these assets is called depreciation. Because depreciation is an accounting adjustment and not an actual cost, it’s not an allowable expense for tax purposes. Instead HMRC have their own rules – tax relief is given using the Capital Allowances rules.
Capital Allowance Rules
For a property rental business, there are specific rules that don’t apply to other businesses – unless your business qualifies for the furnished holiday letting rules.
Because property renting is classed as an investment activity, not a trading activity, HMRC will only give tax relief on the purchase of the property when it is eventually sold.
This is taxed as a capital gain.
The cost of the purchase will include the associated legal fees and SDLT, but will also include the fixtures and fittings. Any improvement to the property, or refurbishment before the first letting, is treated in the same way.
Items of furniture and equipment purchased for the rental property are not allowable as a tax- deductible expense. However a claim can be made for the later replacement of these items.
This is known as replacement of domestic items relief, and will normally cover white goods, cookers and similar. A domestic item is defined as an item for domestic use, including furniture, furnishings, household appliances and kitchenware, but excluding fixtures. Replacing things like boilers, showers and kitchen units, which are integral to the property, are allowable as a repair cost.
Claiming Capital Allowances on Equipment
A landlord running a property rental business can claim capital allowances on equipment used for running the business, such as computers, office furniture and maintenance tools.
These can be claimed to the extent that they are used in the business – ie if they have any private use, the amount claimed for the business will be restricted, this is usually done on a % use basis.
The amount that can be claimed is often 100% of the cost when purchased, but the rate for some items is restricted.
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