The topic of landlord capital allowances has always been a complex one: capital allowances are permitted tax deductions based on money spent on some fixed assets including property, equipment or selected vehicles.
In certain cases, all or some of the value of these assets (known as “plant and machinery”) can be deducted from the profits before paying tax.
© Ink Drop / Shutterstock
Changes in capital allowances
Expenses incurred on improving or altering dwelling houses in general have never qualified for any such benefits with HMRC. However, in years gone by, capital allowances on rental property did provide landlords with a few financial benefits.
A landlord of furnished buy-to-let properties could compensate for refurbishment expenditure to some degree by claiming wear and tear allowance, but unfortunately, the wear and tear allowance was scrapped in April 2016. Residential property investors suffered a severe blow as a result.
The scheme was replaced by the modern equivalent, enabling landlords to claim a tax deduction to replace furnishings on a like-for-like basis – so, a landlord replacing buy-to-let furniture or HMO furniture in their rental properties with a similar furniture package could claim a tax deduction.
However, the new-style HMO capital allowances are far less generous than the original wear and tear allowance.
This used to be the equivalent of 10% of landlords’ rental income, even when no expenditure was actually incurred in the given period.
When the changes were introduced in 2016, most landlords had no choice other than to increase rents or absorb the extra tax costs themselves.
Any tax benefits for HMOs?
Landlords who are converting properties into Houses of Multiple Occupancy or flats should seek professional advice, as they may still be able to claim capital allowances in some circumstances.
A landlord can potentially claim back capital costs on some items and offset them against their rental income, or against their Corporation Tax if operating as a limited company.
Whether flats and coliving properties quality for capital allowances depends on HMRC’s interpretation of a dwelling house.
Flats and individual rooms in HMOs are treated as separate dwelling houses. However, HMRC recognises that communal parts of the property aren’t.
The law states that capital allowances are prohibited only on dwelling houses. It follows that claims can possibly be made on items included in the communal areas.
Some landlords have claimed allowances on bathrooms and kitchens that have been converted into shared rooms within a house. This is a complex and grey area, as HMRC has recently clarified its stance that shared facilities still fall within the dwelling house definition if individual rooms don’t provide tenants with the required facilities for their day-to-day existence.
A lot of expenditure incurred by landlords now no longer qualifies for capital allowances.
What items might qualify?
There’s still some scope for potential capital allowance claims for items such as electrical and plumbing systems, or lighting and lifts in communal areas including hallways, corridors and basements.
This is where the services of a professional tax advisor come in, as in some smaller cases, this may not result in any tax benefits – but large scale conversions can result in significant savings.
According to landlord organisations, the HMRC capital allowances system tends to be more generous when it comes to integral features such as electrical systems, lighting, heating, plumbing, air conditioning and lifts.
If you’re planning any work, it could be useful to consult an expert to help you navigate the HMRC’s complex capital allowances legislation.