Commercial property investment is commonly used by many who want to diversify and build a passive income. Commercial property appeals to seasoned property investors and those starting due to the benefits of rental income, capital appreciation and tax advantages. This is often missed, and one of the significant opportunities available to commercial property owners is capital allowances. It may sound complicated, but the nuances of how these allowances operate can substantially impact your bottom line.
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What Are Capital Allowances?
Source: litrg.org.uk
So, what are capital allowances exactly? Capital allowances are tax relief made available for businesses and property owners who invest in qualifying assets. Such assets may comprise machinery, fixtures and fittings used for the business or in managing property areas within the game and parts of the building.
Capital allowances can cover an extensive list of property-related items for commercial property owners, including electrical, heating, cooling, and building structure elements.
The government provides this tax relief to promote business expansion and investment. Instead of deducting the full asset cost at once, capital allowances enable businesses to write off part of the cost against their taxable profits in the longer term. This may result in considerable tax savings, thus improving cash flow and freeing up funds for reinvestment in the business or property.
How Capital Allowances Apply to Commercial Property
Source: ukpropertyaccountants.co.uk
Commercial property buyers often miss the opportunity to take advantage of capital allowances. This translates to purchasing a lottery ticket to avoid taxes for commercial property owners. To exploit this advantage, the crucial step is knowing which items qualify and ensuring they are accurately captured in tax claims.
- Fixtures and Fittings: Fixtures and fittings are integral to any commercial property and can benefit from capital allowances. Typical items include lighting, heating systems, lifts, air conditioning, and security. When conducting a property assessment, these are not the first things that pop up, but their value can quickly add up, providing excellent tax relief.
- Integral Features: Capital allowances are also available for a building’s integral features, such as fixtures and fittings, electrical and plumbing systems, and structural elements like walls and windows. Identifying these features for capital allowances enables property owners to reduce their tax bills further.
- Refurbishments and Renovations: The cost of refurbishing and renovating a commercial property may be eligible for capital allowance claims. However, when the building’s infrastructure is upgraded, or new fixtures are added, the expenses may qualify for tax relief. Any upgrading spending needs to be recorded and established for inclusion in capital allowance claims.
- Land Remediation: Land remediation works may also be eligible for capital allowances. For instance, the expenditure can be deductible if the commercial property investment concerns cleaning polluted land. This might be especially pertinent for some businesses, like those in the construction or manufacturing sectors, where they may frequently encounter land remediation issues.
Maximising Capital Allowances Claims
Since capital allowances are based on correct calculations, property owners should be careful not to miss out on multi-million-pound claims by not claiming all eligible items allowed for capital allowance purposes. Sadly, commercial property owners frequently miss out on the maximum claimable capital allowances due to being unaware of capital allowances or simply not keeping good records. It is, thus, imperative to seek assistance from professionals who can identify all eligible asset types and prepare accurate claims.
- Engage Experts: Expert quantity surveyors and accountants can help uncover the complete list of assets eligible for capital allowances. An experienced surveyor will analyse the whole property, listing qualifying assets and outlining details of the tax benefit available. That way, it can help prevent any chance of foregoing eligible allowances and ensure that claims are accurate.
- Detailed Documentation: To optimise your capital allowance claims, you need to keep accurate and comprehensive records of all expenses made about the property. Homeowners must record every cost involved in the home’s purchase, upkeep, and enhancement. This covers invoices concerning fixtures, fittings and other qualifying assets. Everything gets evidenced—and that is the key in an audit.
- Review Regularly: A capital allowance is an ongoing opportunity. Re-evaluate regularly and ensure all new purchases, refurbishments or improvements are claimed. This could be done once a year or after significantly improving the property. Tax law changes or changes in eligibility could be announced, and staying informed on those developments is also critical to maximising claims.
- Consider Timing: The timing of capital allowance claims can affect cash flow and tax liabilities. Property owners can claim allowances over several years and/or claim accelerated claims if they want to accelerate their tax relief over a short period. Tax strategy management of the investment must also consider the timing of these claims and how they are accounted for in the financial statements.
The Benefits of Capital Allowances for Commercial Property Owners
Source: legendfinancial.co.uk
Here are some of the financial benefits that capital allowances can provide to owners of commercial property:
- Tax Relief: The most immediate benefit is the reduced taxable profits and, thus, the reduced tax liability. The ability for property owners to utilise allowances reduces the tax that may otherwise be owed, a positive injection for cash flow that could translate into significant savings.
- Improved Investment Returns: Capital allowances can help generate higher overall returns on investment by improving cash flow and reducing ownership costs. By making the most of these allowances, property owners can reinvest the savings in more property improvements or other assets.
- Increased Property Value: When capital allowances are expertly applied, they can maximise tax deductions and significantly increase property value when the holding period is extended. This helps show proper accounting for valuable assets, allowing such properties to be sold for a higher price later on.
Conclusion
Ultimately, knowing how capital allowances operate and how to benefit from this invaluable form of tax relief can enhance the overall returns of your commercial property investment. So, whether buying a new building, replacing existing fixtures or renovating an existing one, capital allowances can save you significant money and improve your investment returns.
