Tax breaks

John Lovell of Lovell Consulting has been working alongside property professionals for almost ten years. Ahead of the changes that April of this year will bring, Mr Lovell gives advice to make sure your business is ready

From April 2008 there are some important changes to capital allowances that property investors and occupiers should be aware.

Few property owners enjoy paying taxes. Is it a surprise? Owners of property get clobbered with a host of taxes. Stamp duty on purchase, business rates when empty, potentially VAT when refurbished, income/corporate tax when let, capital gains tax when sold and ultimately inheritance tax. This year the government forecasts that the total UK tax bill will increase from £480bn to £520bn, which equates to a tax inflation rate of 8 percent.

Despite all these devices to raise property tax there is one area where it is possible to achieve savings. This is with capital allowances. My personal experience indicates that 50 percent of property owners do not claim the allowances available. The main reason property owners fail to reduce their taxes is because the tax relief available is quite complex.

General plant
Within buildings, landlord plant such as sanitary ware, carpets, demountable partitions, fittings and signage may be offset against taxation. For instance, £1m of plant owned by a company paying tax at 28 percent will provide a tax saving over time of £280,000. From April, this tax relief will be provided at a lower annual rate of 20 percent on a declining balance basis. Before April it is available at a rate of 25 percent.

Integral features
The government has announced that there will be a new category of plant called integral features. This will actually extend the definition of what is plant. From April expenditure on the entire electrical installation system will be plant along with cold water systems, active facades and solar shading.

Prior to April, for many properties it was difficult to persuade HMRC that all this expenditure was plant. Despite this apparent act of generosity there is a sting. The annual rate of this allowance has reduced from 25 percent to 10 percent. Moreover, the definition of this lower rate band includes heating, air-conditioning and lifts which were previously accepted as plant at the higher general plant rate. This new class of plant opens the possibility of making additional claims for allowances for second hand properties purchased where all allowances had been stripped out by former owners.

Industrial buildings allowances and hotel allowances
A miserly measure in the budget was the phasing out of allowances for industrial buildings and hotels. From April, the benefit of these allowances will be reduced by a factor of 25 percent until 2011 when they are completely scrapped. These allowances apply to the cost of the building structure. It will still be possible to claim the plant in these types of properties. Many property owners do not realise they can claim these allowances when they buy second hand property.

100 percent allowance for green plant
For expenditure on energy efficient plant it is possible to reclaim all of the tax in one year. Details of Government approved plant are available on www.eca.gov.uk.

150 percent contaminated land relief and asbestos removal
This is probably the most generous tax relief available and the least claimed. Expenditure on decontaminating land and removing asbestos potentially qualifies for 150 percent tax relief. For instance, if you spend £500,000 cleaning up land it will provide a tax saving to a company of £210,000. You need to highlight this expenditure to your tax advisor.

Other tax savings
Savings are available for expenditure on repairs and these may depending on accounting treatment be available all in one year. Another area to consider is the structuring of payments for tenant fit out. If these are allocated to plant in the agreement to lease potentially, the landlord may claim tax relief.

So alongside interest deductions, capital allowances are an essential tool for reducing the burden of taxation. It is important to plan ahead to ensure you claim what is due.