Capital Allowance
December 14, 2024
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December 14, 2024
A capital allowance is UK tax relief for “capital” expenditure on business assets.
Capital investment creates an asset for the longer-term and the spend is usually recorded in the business’s accounts on the balance sheet as a fixed asset. Claiming a capital allowance reduces the business’s annual taxable income, which in turn reduces the tax it has to pay.
Capital allowances may be available on a significant proportion of the expenditure incurred. Assets that attract greater or faster tax relief include air-conditioning and water systems through to data cabling, lighting and many other assets.
There are various types of capital allowances and rates available. These dictate the percentage of the asset’s cost that is written-down each year for tax.
The two main types of capital allowances are “plant and machinery allowances” and “structures and buildings allowances”. Another similar property tax relief is also available called “land remediation relief” but this is a corporation tax relief, not a capital allowance.
Plant and machinery allowances are available for spend on business equipment, including many ordinary “fixtures” in commercial property and the common parts of multi-let residential properties. Fixtures are assets that become part of the property in law.
In a real estate setting, plant and machinery (P&M) assets are divided into two main categories:
Plant and machinery allowances are available at several rates depending on the type of P&M and when the money was spent:
Structures and buildings allowances
3% structures and buildings allowances – Structures and buildings allowances (SBAs) are available at a flat-rate 3% for spend on structures and buildings that do not qualify for plant & machinery allowances or land remediation relief. They are not given for residential property.
Land remediation relief
150% land remediation relief – This is given to companies that clean up contaminated land and buildings or bring long-term derelict land back into economic use. It is a 150% relief from corporation tax and is available to developers, investors and occupiers, and for both commercial and residential property.
The following example shows how capital allowances reduce the amount of tax payable, assuming a company tax rate of 19%. In the example below capital allowances is able to reduce the amount of tax payable by £190,000
The following example shows how capital allowances reduce the amount of tax payable, assuming a company tax rate of 19%. In the example below capital allowances is able to reduce the amount of tax payable by £190,000
WITHOUT CAPITAL ALLOWANCES
Profit before Tax £2,000,000
Capital Allowances 0
Taxable Profit £2,000,000
Tax payable @19% £380,000
WITH CAPITAL ALLOWANCES
Profit before Tax £2,000,000
Capital Allowances (£1,000,000)
Taxable Profit £1,000,000
Tax payable @19% £190,000
As the example above shows, claiming capital allowances allows you to claim a proportion of your investment expenditure back against your taxable income or profits. This reduces the amount of tax payable on your profits and frees up cashflow for further investment in your business.
Capital allowances are available to property occupiers and investors, and both income and corporation tax payers. They are a valuable incentive to almost all businesses.
If you have recently incurred capital expenditure to buy, build or refurbish commercial property and you pay income or corporation tax then it is likely that you will be able to benefit from capital allowances.
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