Student landlords are under bombardment from firms pledging to cut their taxes by helping them claim capital allowances for their rental properties.
Saving tax on a letting property is not that simple because the rules for claiming capital allowances are not straightforward.
HM Revenue and Customs are quick to stifle claims that do not relate to business premises and recent law changes tighten up the tax saving criteria.
Capital allowances are tax reducers - an allowance claimed for investment in fixtures, fittings and equipment at a property.
They reduce taxable profits pro rata the claim as the annual investment allowance or writing down allowance on the value of the asset over a period of time.
Capital allowances valuers reckon that up to 20% of the purchase price of a house in multiple occupation (HMO) or furnished holiday let can be reclaimed.
But there are several points to watch:
• Capital allowances can only be claimed on common areas of HMOs up to October 2010, when a judge held that common areas were part of a dwelling house, which automatically exempts them from a claim.
• No capital allowances can be claimed on letting rooms in an HMO
• A ‘dwelling house’ is not defined in law, so the meaning is open to interpretation and generally follows the dictionary meaning.
• The dwelling house exclusion means landlords letting rooms in their own homes are excluded from making claims
• Property investors need to weigh the cost of a survey against the likely tax saving - especially for a property overseas
HMRC is also seeking to limit claims when a property is sold because of a mismatch between capital allowance valuations by sellers and buyers. Both figures should be the same, but sellers want a lower valuation to avoid paying more tax with a balancing charge, while buyers want a high valuation to maximise their claim.
As a result HM Treasury has announced a short consultation to collect opinions on two proposals -
• Limiting the time a buyer can claim capital allowances after purchase
• Making buyers and sellers agree a capital allowances valuation as part of the sales transaction
