Updated: Jul 3, 2020
From the 1st January 2019, businesses and commercial property investors that are refurbishing or extending their current buildings can claim up to £1,000,000 worth of tax-free income by way of capital allowances.
The £1,000,000 allowance is given upfront on all qualifying plant and you will pay no tax on your profits until the allowance is exhausted.
What is a capital allowance?
A capital allowance is a sum of money you deduct from your net profits in order to lessen your tax burden and claiming at the correct time can massively increase cash flow in the period after a substantial refurbishment/new build programme.
Capital allowances are claimed against items of plant installed in the property that have a purpose for the trade and include electrical and lighting installations, heating and ventilation systems, fire and security alarms all the way through to door handles and floor coverings.
Individually these items of plant may not amount to much but when combined for capital allowances reporting they can equal as much as 75% of any given refurbishment cost.
The £1,000,000 allowance is also available to be claimed on new builds and claiming can result in upwards of 40% of the total build cost back as a source of tax relief. Further to this there is also the opportunity to claim this allowance when purchasing commercial property, however there are a few instances were restriction from HMRC could come in to play and inhibit the ability to claim under this allowance.
How it works
Company A builds an office for £2,500,000 and JNC identify £1,000,000 in capital allowances.
Company A’s net profit from renting the property is £500,000 per annum.
Company A claims the full £1,000,000 upfront allowance, writes of the current years £500,000 profit and carries forward the remaining £500,000 as a loss.
Company A brings forward the £500,000 loss in the next tax year and in turn pays no corporation tax for 2 years.
Company A saves £190,000 in corporation tax by claiming this allowance.
Company B refurbishes an office for £1,000,000 and JNC identify £750,000 in capital allowances.
Company B's net profit from renting the property is £250,000 per annum.
Company B claims a £750,000 upfront allowance, writes of the current years £250,000 profit and carries forward the remaining £500,000 as a loss.
Company B brings forward the £500,000 loss in the next tax year and in turn pays no corporation tax for 3 years.
Company B saves £142,500 in corporation tax by claiming this allowance.
Claiming under the annual investment allowance could not be easier and can be claimed in personal, partnership and limited company tax returns. The current amount of £1,000,000 is only available for the next two years so if you are looking at purchasing, refurbishing or building commercial property, now is the time to do it.
To find out more about this allowance and how it can benefit your business please call us on 0843 005 9711 or use the contact form to get in touch.
James Nazir & Co