Types of Capital Allowances for Property Investors
Capital allowances are critical for property investors in the UK, offering significant tax relief on qualifying expenditures. Understanding the different types of capital allowances available can help property investors optimise their tax strategies and enhance profitability. This guide provides an overview of the main types of capital allowances that property investors can utilise.
- Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) allows property investors to deduct the full value of qualifying plant and machinery from their profits before tax up to a specified annual limit.
Limit – Currently AIA is set at £1 million for the Tax Year 2024/25. However,if your accounting period is less than 12 months, the AIA limit will be proportionately reduced
Benefit – Offers immediate tax relief on qualifying expenditures within the annual limit.
- Writing Down Allowance (WDA)
Writing Down Allowance (WDA) allows property investors to deduct a percentage of the value of certain items from the profits every year.
Main Rate Pool – Most plant and machinery assets qualify for an annual deduction of 18%.
Special Rate Pool – Includes long-life assets and integral features with an annual deduction of 6%.
- Structures and Buildings Allowance (SBA)
The Structures and Buildings Allowance (SBA) provides relief for the costs of constructing buildings and structures such as offices, retail and wholesale premises. However, SBA cannot be claimed on residential property and other buildings that function as dwellings.
Rate – Offers a deduction of 3% per year of the costs over a straight-line method for 33.33 years.
Benefit – Encourages investment in commercial properties by providing long-term tax relief.
- 100% First Year Allowance (FYA)
FYA enables property businesses to claim a 100% deduction on qualifying capital expenditurein the year the expenditure was incurred.
Benefit – Allows property businesses to deduct the entire cost of the asset from their taxable profits in the year of purchase, instead of claiming the cost over several years through WDA.
Scope – Available for specific assets, including energy-saving equipment and low-emission cars.
- 50% First Year Allowance (50% FYA)
50% First Year Allowance, also referred to as SR allowance, allows to claim the cost of certain plant and machinery bought for your business from 1 April 2021 up to and including 31 March 2023.
Benefit – Provides a first-year allowance at 50% for the special rate capital expenditure on plant and machinery incurred by companies from 1 April 2021 to 31 March 2023.
Extension – The 2023 Spring Budget extended the SR allowance by three years until 31 March 2026, allowing property businesses to deduct 50% of the cost of eligible assets from their profits before tax.
Conclusion
Capital allowances are a vital component of effective tax planning for property investors. For comprehensive guidance on capital allowances and how to leverage them for your property investments, consult the experts at UK Property Accountants. Their expertise can help you navigate the complexities of capital allowances and optimise your tax strategies.