Capital allowances are a key area of tax relief for businesses investing in capital assets.
For property developers, the application of these allowances is nuanced and often misunderstood. We help lots of clients to make sense of these rules, providing clear and strategic guidance.
1. Understanding Capital Allowances
Capital allowances allow businesses to deduct the cost of certain capital assets from their taxable profits.
Allowance Type | Rate | Applies To | Notes |
Annual Investment Allowance (AIA) | 100% | Plant and machinery (up to £1 million) | Available to most businesses; not available for cars. |
Full Expensing | 100% | New, unused main rate plant and machinery (companies only) | Not for leased assets or second-hand items. |
First-Year Allowance (FYA) | 100% | Electric vehicle charging points, zero-emission goods vehicles, etc. | Must be new and unused. |
Writing Down Allowance (Main Pool) | 18% | General plant and machinery not qualifying for AIA or FYA | Applied annually on reducing balance basis. |
Writing Down Allowance (Special Rate Pool) | 6% | Long-life assets, integral features, high-emission cars | Applied annually on reducing balance basis. |
Small Pools Allowance | 100% | If balance of pool is £1,000 or less | Allows full deduction in year. |
Structures and Buildings Allowance (SBA) | 3% straight-line | Commercial buildings construction or renovation | Spread over 33 1/3 years. |
Electric Cars (FYA) | 100% | New electric or zero-emission cars | Must be new and not leased. |
Cars with CO₂ ≤ 50g/km | 18% | Low-emission cars | If FYA not claimed. |
Cars with CO₂ > 50g/km and ≤ 110g/km | 6% | Medium-emission cars | WDA only. |
Cars with CO₂ > 110g/km | 6% | High-emission cars | WDA only. |
2. Developers vs Investors: Why It Matters
HMRC distinguishes between:
- Property developers: Those who construct or refurbish property with the intention to sell (trading activity).
- Property investors: Those who hold property to generate rental income (investment activity).
This distinction is crucial because:
- Developers typically treat construction costs as trading stock (revenue expenditure), which is not eligible for capital allowances.
- Investors may claim capital allowances on qualifying expenditure because the property is held as a capital asset.
3. When Can Developers Claim Capital Allowances?
Developers can only claim capital allowances in limited circumstances, such as:
Retaining Property for Letting or Use
If a developer retains a completed property for:
- Commercial letting (e.g. offices, retail units)
- Use in their own business (e.g. as a head office)
Then the property is no longer trading stock and capital allowances may be claimed on qualifying expenditure.
What Can You Claim For?
In commercial developments, eligible items often include:
- Air conditioning and ventilation systems (HVAC)
- Electrical and lighting installations
- Fire alarms and security systems
- Lifts and escalators
- Washroom fittings and commercial kitchens
- Data cabling and communication systems
Real-World Example: Commercial Office Development
Imagine you’re developing a new office block and you install:
- High-efficiency HVAC system
- LED lighting throughout
- Secure entry system
- Modern washroom facilities
- Electrical Systems
- Fire Alarm System
- Life installation
These are all capital expenses which are costs incurred to acquire or upgrade physical assets.
Outcome: Financial Impact (profit making business)
Let’s say your total spend on these qualifying items is £500,000 (no other expenditure on capital items).
- Under the Annual Investment Allowance (AIA), you are able to deduct 100% of this in the first year (up to the AIA limit, which is currently £1 million).
- This means £500,000 is deducted from your taxable profits.
- If your corporation tax rate is 25%, that’s a £125,000 tax saving in year one.
Benefits:
- Improved cash flow: You retain more cash in the business due to lower tax payments.
- Encourages investment: Tax relief makes it more attractive to invest in energy-efficient and modern systems.
- Sustainability: Many of these systems (like LED lighting and efficient HVAC) also reduce long-term operating costs.
How Can We Help:
- Spot the Opportunities: we know what qualifies and what doesn’t so you don’t miss a thing.
- Maximise the Claim: we’ll ensure every eligible cost is captured and documented.
- Handle the Paperwork: preparing and submitting technical reports to HMRC.
- Plan Ahead: we can advise on structuring future projects to maximise relief from day one.
- Tax Savings: potentially save tens or even hundreds of thousands in tax.
Final Thoughts
Capital allowances aren’t just a tax perk, they’re a smart business strategy. They help you reinvest in your projects, improve Return on Investment and stay competitive in a fast-moving market.
This doesn’t have to be done alone. We can support you every step of the way.
