It’s possible that capital allowances may be claimed when refurbishing or converting commercial buildings to residential. The ‘replacement value’ of fixtures and fittings of commercial buildings have a a value even if you plan on discarding these fixtures. In some instances you claim for all fixtures and fittings within the building and offset the value as tax relief on your future tax liabilities. Needless to say this is can have huge implications on the amount of tax liability you’re able to offset.

Fittings include things like:-

Plug sockets, light fittings, air conditioning units, lifts and escalators, bathroom basins and hardware, door hardware, carpets and many other fittings. These ‘replacement’ costs can add up to a huge amount and be applied as tax relief to your tax liability.

What does this mean?

Basically what this means is that if for example a capital allowances surveyor identifies 100,000 pounds worth of capital expenditure allowances it can translate to 100,00 pounds worth of your income that you do not need to pay tax on. This can apply to corporation tax or personal income tax depending on whether you purchased the property in a company or in your personal name. The only caveat to claiming the tax relief on future income is that the trading or rental income has to have been received from the specific building to which the capital expenditure applies.

Capital allowances must be claimed before the fixtures and fittings are removed and destroyed and you must receive consent from the previous owner to make your claim which is why this process must be discussed and negotiated at the beginning of any negotiation. For example, you may wish to make your offer to purchase the building and include a clause subject to being able to claim for capital allowances. This wouldn’t affect the previous owners position but it could affect your tax liability and your retained income.

You have an unlimited amount of time to claim the allowances which means the allowances sit on your accounts until you need to use them to offset income or corporation tax. Therefore in our example above where you have identified £100,000 of capital allowances, if you earn £50,000 of income from the building in the first year you can offset £50,000 worth of allowances and the remainder £50,000 would remain on your accounts until you need them next year.

A specialist tax accountant or capital allowances specialist might charge in the region of 5-6% to create and submit a capital allowances report with your annual accounts.

Claiming capital allowances is a complex subject and you should consult with a tax specialist who is familiar with capital allowances to survey your building for capital allowances, however you should know that by using capital allowances you can drastically reduce your tax liability and carry that relief forward for future years. This tax relief is an extremely valuable consideration when deciding to refurbish or convert commercial buildings to residential and it is one of the reasons why you might decide to purchase a commercial building within a Limited company or within an LLP (Limited Liability Partnership).

For more information about claiming capital allowances speak to a capital allowances specialist.

Other resources:

A good place to begin learning about capital allowances is the gov.uk website

Capital allowance specialists hmatax.co.uk, smithmcbride.co.uk and Usman Nazir