HMO and Capital Allowances

 

 

Introduction

Depreciation of fixed assets charged in the accounts is not allowable in computing taxable profits. Instead, the UK government introduced capital allowances which is a form of tax relief that allows businesses which pay tax in the UK to deduct from their taxable profit (before calculating their tax liability), the value of their qualifying capital expenditure on assets such as equipment or buildings.

Capital allowances is a financial benefit designed to incentivise businesses to invest in capital expenditure. In accordance with section 35 of the Capital Allowances Act 2001, Capital allowances is normally only available in respect of non-dwelling-house commercial properties including hotels and furnished holiday letthings, but not typical rented accommodations. Similarly, a hospital, prison, and nursing homes are not dwelling houses. There are various forms, types and categories of capital allowances. The most common form is the plant and machinery allowances (PMA). PMA provide tax relief on capital assets such as components of a commercial building and business equipment qualifying as plant and machinery.

 

Restrictions

There is no definition of “dwelling-house” in the legislation so the term takes its ordinary meaning. According to HMRC, a dwelling-house is a building, or a part of a building that its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.

HMRC also clarified that a person’s second or holiday home or accommodation used for holiday letting is a dwelling-house. A block of flats is not a dwelling-house although the individual flats within the block may be. This is where the interaction of a house in multiple occuplation (HMO) with capital allowances requires careful consideration. The common parts of the HMO which contains two or more self-contained flats (i.e. with bathroom and cooking facility), for example the hallway and stairs, is not considered dwelling-house and therefore not precluded from a capital allowances claim.

HMRC’s opinion is as follows:

We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position.

In summary, careful consideration should be taken before claiming capital allowances on HMOs. Claims should be restricted to common areas of the HMO which contains two or more self-contained flats, for example the hallway and stairs, is not precluded from a capital allowances claim. It is however worth noting that due to the restriction, the tax saving benefit may not be material enough to justify a claim from the benefit of the tax payer. It is typically more beneficial to pursue such a claim if the project spend is significant.

Example: Company A (subject to 19% Corporation Tax rate) incurs fit out capital expenditure of £100,000 relating to plant and machinery in a HMO with self-contained flats. Assuming 25% of the capital expenditure relate to assets in the common lounge and hallway, then Company A will be entitled to tax cash saving benefit of £4,750 (£100,000 x 25% x 19%).

Next Steps

Capital allowances is a vast topic and there are various forms, types and categories. Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.

Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?

  • New construction
  • Refurbishment works
  • Fit out works
  • Buying buildings

Please let us know as we can help you maximise your capital allowances tax cash savings and Boost Your Impact.