How Do Capital Allowances Work for Small Commercial Property Investors?
I purchased two freehold commercial properties for investment in 2011, one for approximately £130,000 and one for approximately £120,000. They are both occupied on commercial leases. They are both running as restaurants with flat above (one of which was sold on a long lease). Can I claim 25% of total purchase price of £250,000 which is £62,500 from HRMC and then another 25% later on for the period I hold these investments? Both are in my sole name. I am confused how capital allowances work for small time commercial property investors.

Arthur Weller Replies:

Capital allowances are available to the landlords of commercial property, but not on the whole property. They are only available on ‘integral features’ and certain special expenditure e.g. thermal insulation. Integral features include electrical (e.g. lighting) systems; cold water systems; space or water heating systems; powered systems of ventilation; air cooling or air purification (and any floor or ceiling comprised in such) systems; lifts, escalators and moving walkways; and external solar shading. From 2008-09 the rate of writing down allowance on these integral features of a building is the special rate of 10%, but from April 2012 it is 8%. This is calculated according to the reducing balance method – i.e. claim (e.g.) 10% the first year, then in the second year (e.g.) 8% of the 90% remaining from the first year, then in the third year 8% of the 82% remaining from the second year etc. I would advise you to get a valuation done – so that you know how much of the £250,000 you spent was attributable to the integral features, and how much was attributable to everything else. As regards the flats above – capital allowances are not available for dwelling houses; there are different rules that apply to them – e.g. the 10% wear and tear allowance.

This question was first printed in Tax Insider in April 2012.

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