What Is Embedded Capital Allowance On Commercial Property?

Understanding Embedded Capital Allowance

Businesses or individuals that own commercial property can, in some cases able to benefit from capital allowances. Capital allowances are effectively a type of tax relief offered by HMRC on the capital expenditure required to:

• Construct commercial property
• Refurbish a leased commercial property
• Purchase of an old or newly built property

The amount of capital allowance you can reclaim from HMRC will depend on your capital expenditure and what you have spent it on (i.e., renovation, purchase, construction, type of property etc.) and a number of other factors. Types of commercial property that can be eligible for embedded capital allowance include:

• Furnished holiday lets
• Pubs and restaurants
• Office space
• Factories
• Industrial buildings
• Surgeries
• Care homes
• Hotels
• Etc.

Why Consider Making A Capital Allowance Claim?

If you have made capital asset expenditure linked to a commercial property, you may be able to make a claim to HMRC to get tax relief on the cost of purchasing the asset itself or the costs of assets that form part of a renovation or refurbishment of a commercial property (i.e., hardware, electrics, central heating systems, etc.) The claim may mean you are entitled to a tax refund, or that you can deduct the allowance from your taxable profits.

Many commercial property owners don’t know that they can make a tax relief claim related to purchases they have made on assets for a commercial property or the purchase or commission (in the case of a new build) on the property itself. However, there can be significant savings to be made in the form of tax relief as you may be eligible for significant tax rebates which can be deducted from your taxable profit. The amount you will be able to claim is dependent on a number of factors, but in some cases, as much as 35% of the property price can be reclaimed. Even professional generalist accountants may not know how to calculate a claim, which is why capital tax allowance claims are being overlooked.

Understanding Capital Tax Allowance

The process to calculate the amount of capital allowance and make a claim to HMRC is very complex. To be able to calculate the claim amount requires specialist knowledge of property surveyance and niche tax legislation. Not all your capital expenditure is subject to relief, and the capital expenses you have incurred will have different allowance rates which affects how much relief you can claim. Each of the allowances you are eligible for needs to be calculated, documented and justified separately and added to the total of your claim to HMRC. Even accountants or tax generalists can struggle to calculate how much capital allowance you or your business would be due because of the many different angles that need to be considered as part of any single claim. HMRC is also meticulous about assessing the calculable basis for a capital allowance relief and any discrepancy, mistake or irregularity will delay or even void a claim in its entirety.

HMRC is usually relief is not generally given as a lump sum (if you are eligible for a tax refund) or in the form of tax relief on your taxable profit base at the time the expenditure is incurred, but instead is staggered over a number of years. Different types of expenditure attract allowances at different rates.

Eligibility

A capital allowance claim can be made on almost any kind of commercial property, ranging from care homes to furnished holiday lets, meaning businesses and private landlords can be eligible. This type of relief is only eligible for UK tax holders, and you can make a maximum of one claim for capital allowance relief on each commercial property you own. It’s worth noting that the property doesn’t have to be owned in a corporate structure to be eligible: capital allowance relief can also be claimed by individuals, which is ideal if you have invested in a furnished holiday let, for example. A limited company or limited partnership can also make a claim and usually larger commercial property claims are made by a corporate entity. A commercial property that is owned by a pension fund or charity is not eligible for capital allowance relief, however.

At a glance, to be eligible, you will need:

• To have paid more than £500k for the property, although lower values can be considered
• To have a profitable business as documented in your tax returns
• To be a UK taxpayer. If you are not a UK taxpayer but would otherwise be eligible and have UK corporate entities, in some cases a claim can be made and structured through UK entities within the overarching corporate structure of companies, although this will usually only be worth it for larger claims and it may take longer to receive relief
• To have not made a capital allowance claim in the past on the property
• To own the property in your own name, via a limited partnership or limited company – property owned by a pension fund or charity isn’t eligible for the relief

Cutoffs For Claims – What To Know

If you bought a commercial property or had a commercial property constructed before April 2014, there is no restriction on the amount of time you have to make a capital allowance relief claim. Because HMRC doesn’t usually pay out the relief (or tax refund) in a lump sum or apply it to profits incurred in a single tax year when your claim is approved, moving sooner, rather than later to make a claim is usually advantageous. You may also be eligible for a reduction in your future tax liability associated with the property if you are a higher-rate taxpayer, and usually, it’ll be in your best interest to exercise this as quickly as you can.

From April 2024, HMRC introduce new rules that restrict the amount of time an owner has to claim capital tax relief. Once this timeframe has passed, it is no longer possible to make a claim and you may miss out on a tax refund or tax relief. The regulations around cutoffs are complex because they relate to the purchase of commercial property that is not newly built, and concerns capital allowance claims that were made (or not) by previous owners on certain types of fixtures within the building. If you purchased a property after April of 2014, the best way to understand what’s possible with regards to making a potential capital allowance claim is to have a capital expenditure expert assess the property so you can understand what’s possible in line with regulations and your property. Again, moving quickly because of the cutoff time to make a claim is advisable.

Capital Allowance Claims – How Enness Can Help

Enness is a finance broker and we do not make capital allowance claims on the basis of the very specialist tax knowledge required to execute a claim to HMRC. However, we take a holistic approach to optimizing any transaction we work on from all angles, so we often identify if a claim can be made as part of our standard analysis of a client’s assets and negotiating finance. If we identify that you could make a capital allowance claim, we will inform you, and if you are willing to explore further, can connect you with a specialist, reputed and regulated tax adviser who can help you make a claim.