If you own a HMO or Multi-let property, you may be able to take advantage of Capital Allowances Tax relief, to mitigate your previous and current year’s tax liability.

Whether you are an armchair property investor, entrepreneur, or own just 1 HMO property, you could mitigate your current liability, and also get a refund from HMRC for previously paid tax!

Capital Allowances – what are they?

Plant & Machinery Capital Allowances, relate to the tax relief associated with certain qualifying items within the communal areas of HMO properties.

Having recently come into the limelight do to a technical clarification by HMRC, these allowances are an extremely valuable tax relief, and are ‘set-off’ against ANY INCOME STREAM! You can reclaim tax paid up to 5 years and 10 month previously – as long as you have owned the property since then.

Once these items have been identified, valued and documented, you can reclaim previously paid Income tax, reduce your current year income tax liability, or roll forward the allowances until such time when they are required, depending on how long you have owned the property.

There is no time restriction on claiming – a property you have owned for 10 years, can qualify!

Capital Allowances tax relief has been around, in one form or another, since 1878. These are widely used by the commercial sector and are also available to individuals who own qualifying properties. Capital Allowances cover a number of tax relief strategies including Plant & Machinery Allowances Relief.

Capital Allowances has no impact on, and is completely separate from Capital Gains Taxation or Wear & Tear relief.

Plant & Machinery Allowances Relief

Plant and machinery for HMO’s includes:-

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.

This list is by no means exhaustive but provides a guide to the plant & machinery most commonly found in buildings.

In addition, expenditure incurred on certain other assets including fire safety, thermal insulation and building alterations incidental to the installation of plant and machinery may also be eligible.
The rate of relief varies from 100% in the year of purchase (AIA / FYA), to 10% (WDA).

Who Can Claim?

Must be a UK Tax Payer (Either Income tax, or Corporation tax)
Must incur the capital expenditure.
Must be ‘qualifying’ items of expenditure or ‘qualifying’ buildings.

What Can Be Claimed?

Development of property
Fit out works
Refurbishment or alteration works to existing property
Purchase of property

How much can be saved?

Typically, between 15% and 25% of the purchase price of a HMO property will qualify for Plant & Machinery Capital Allowances Tax relief.

Purchase Price Capital Allowances available (tax free income)

£100,000 £20,000
£120,000 £24,000
£140,000 £28,000
£160,000 £32,000
£180,000 £36,000
£200,000 £40,000
£250,000 £50,000
£350,000 £70,000

n.b. – these allowances are averages, based on previous work undertaken, your property may attract more, or less capital allowances. Your claim is based on purchase price, qualifying expenditure, and the total communal areas of the property. This is a guide only.

Great – How do I claim?

Once we have undertaken the financial assets survey of the property, valued and submitted the claim report to you, simply ask you accountant to amend previously submitted tax returns, for historic rebates, or to include the valuation within the current year tax return.

This relief gets ‘set-off’ against your taxable income, therefore reducing the tax you pay.

We at Exact Business Services Ltd, offer a ‘No-money down’ option to HMO and Multi-let owners who have paid tax previously. Contact Arthur Kemp at Exact Business Services Ltd to find out more, and to see how this works.

All work is issued is adherence to strict HMRC guidelines, and is seen through to remittance.

For further information or to arrange a survey on YOUR HMO properties, drop us an e-mail at info@hmotax.co.uk or visit our website at www.hmotax.co.uk

Case study of Capital Allowances for Adam & Frances Long.

Adam and Frances Long are property investors, with a substantial portfolio. They own single rental units, HMO properties as well as a block of flats in London.

Adam and Frances have been investing in property for over 10 years and have a varied portfolio spread across the country. They specialise in providing housing solutions to those who cannot obtain finance in the traditional manner as well as assisting homeowners who are struggling to sell due to negative equity or debt problems. By using advance financing methods they are able to free the homeowner from his burdens within 7 days or less.

Adam and Frances were intrigued by the fact that Capital Allowances can be used to reduce their overall tax liabilities. I explained that these allowances can also be used against any other income stream, which was pertinent, as both Adam & Frances have alternative sources of income, apart from their properties.

I agreed to attend one of the Long's addresses in London which housed 9 separate private flats. The building was purchased for around £1.2M and is located in Islington. I explained, prior to my visit, that Capital Allowances tax relief does not apply to 'dwellings' and as such, only certain Plant & Machinery items within the communal areas of the building, would qualify for tax relief.

Having undertaken the financial assets survey of the building, it was clear that the only communal areas of the property were the access hallways. These housed the utility meters had lighting, some soft furnishings and fire precaution installation. Although not a large claim due to the relatively small communal areas, qualifying assets of £35,000 were identified, and could therefore be used to mitigate their tax liabilities.

I had also explained that once the assets had been identified, logged and valued, one could use these allowances to amend previously submitted tax returns. This means that refunds of tax paid can be recovered. The time limitation is restricted to ownership of the properties or 5 years and 10 months. This can be a very valuable tool, as it can mean potentially large sums of money can be recovered.

The following week, I arranged to meet Adam & Frances at their HMO properties located in Bishop Stortford, and Chelmsford. All of these properties are what I consider to be 'traditional' HMO's. They have private rooms for the tenants, but all share a Kitchen, Bathroom, WC, storage, access, lounge and dining areas.

All 3 of these properties were purchased directly from the developer, and are completed to a very high standard.

£120,000 of allowances were identified over the three properties. This represents around 19% of the combined purchase price.

The allowance of £120,000 is treated as a business expense, and can be 'set-off' against general income of the individual. Effectively, extending ones tax free income by £120,000. If one was a higher rate tax payer, this would currently represent £48,000 in taxation savings or refund.

As Adam and Frances are join owners of these properties, the Allowances are usually split 50:50. However, if partners were to enter into a 'partnership agreement' (under the guidance provided by HMRC in “PIM103 – Introduction: Jointly owned property & Partnerships”), then the allowances can be apportioned on the basis of the agreement. This would mean that all of the allowances could be allocated to the higher/only tax payer of the couple. A useful tip!

To contact Adam & Frances Long to discuss how Capital Allowances have been utilised, or to discuss their property provisions, please call 01992 660 391 or e-mail quickbuyhomes@ntlworld.co.uk or visit their website www.quickbuyhomes.co.uk

For further information regarding Capital Allowances, please review www.hmotax.co.uk or e-mail at info@hmotax.co.uk or call 01733 248 706.

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