Tax relief on capital expenditure

Rental businesses and trouble with capital expenditure for tax relief

When it comes to tax relief for capital expenditure, there’s more than one rule which determines the type of tax relief you can claim for on a property rental business.

Different rules can apply from year to year. Which can you claim and can you ensure maximum relief?

tax relief on capital expenditure - image of kitchen

Generally, when it comes to tax relief on capital expenditure it doesn’t matter what type of property you let, you’re entitled to a tax deduction for the costs of running your rental business.

The exception to this rule is the cost of capital items such as equipment. These qualify for capital allowances (CAs). But if the property is residential you can’t claim CAs for equipment etc. used by the tenant unless the property qualifies as a furnished holiday let (FHL).

CAs are tax deductions allowed instead of depreciation shown as an expense in your rental business accounts. If you have an FHL you can claim them for equipment such as cookers, beds, TVs or other furnishings. The trouble is your property might qualify as an FHL one year but not the next. 

If your property ceases to qualify as an FHL, you must work out the CAs for the last year that it did as if you had stopped letting it altogether. You must a value on all the items which you’ve claimed or could claim CAs on and deduct that from the value for tax purposes, i.e. the cost of the item less the CAs you’ve claimed. The difference, if positive, is an extra tax allowance, and if negative is taxable as income. 

Jack lets a property that qualified as an FHK for 2018/19, but not for 2019/20. It qualifies as an FHL again in 2020/21. At the end of 2018/19 the value of items on which Jack has claimed CAs is £6000. The total cost of items for which CAs have been claimed was £18,000. Jack claimed for all of this which means that the value for tax purposes is zero (£18,000 cost less CAs claimed £18,000). Deducting the £6000 from this produces a negative figure which is therefore taxable as income for 2018/19. When the property qualifies as an FHL again (2020/21) Jack can again claim CAs for any of the capital items that are still in the property. The trouble is if they have devalued he is only entitled to claim CAs for the devalued amount.

In 2019/20 Jack’s property is a non-FHL qualifying year. Jack isn’t entitled to claim any tax deduction for the items that previously qualified for CAS. Also, if he purchases new items he can’t claim capital allowances for these either. However, he will be entitled to claim for CAs both old and new items when the property again qualifies as an FHL. The trouble is that all the items will have depreciated meaning that he won’t receive as much tax relief.

Do you need help working out your tax relief on capital expenditure in your property rental business? Get in touch and we can help.

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