Any property that you purchase for your business qualifies as an asset for tax and accounting reporting purposes. As such, the value of the company property is classified as a capital expenditure and it will be listed on your company’s balance sheet as a fixed asset. Unfortunately, this means that you will not qualify to receive tax relief for the cost of the property.
The rules apply differently, however, in the case of property traders. Property traders purchase and sell properties as their primary business. For this reason, properties are not considered ‘assets’ but they are treated instead in the same way that stocks are treated—meaning that the value of the properties will be recorded on the company’s balance sheet but the cost of each estate can be deducted when calculating the company’s taxable profits.
This distinction between property traders and regular companies who purchase estates is critical because it means that the average company will not be able to immediately claim property expenses as tax deductions under UK law. Also, it is important to keep in mind that the “cost” of the estate constitutes more than just the acquisition cost, it also it also includes other associated expenses like stamp duty or conveyances fees.
Under this system, companies that purchase property will only be able to receive tax relief for the estate purchase expense once the property is sold. If there is any appreciation in value for the property at this point from the initial purchase expense, the profits will be reflected as capital gains and they may be subject to tax liability.
Since many companies do not sell their properties for many years, they will not benefit from tax relief for an extended period of time. However, there are certain deductions that you can make after purchasing property in order to maximise your tax relief; these deductions include:
Finance and Interest costs
You can deduct finance/interest costs from trading profits in accordance to deductions on your account.
When you purchase property, you may also incur other costs associated with the financing; these indirect costs, however, cannot be deducted from taxable income. In most cases, these costs are capital expenses and therefore do not qualify for tax deductions. If you do have these indirect costs, it is important that you identify which expense are directly associated with the financing of the property (for example mortgage loans and other borrowing related to the acquisition cost) and exclude any indirect costs from your tax deductions.
Legal and professional fees that are a result of the property’s financing may be deductible from taxable income. The deduction qualifies under ‘incidental costs of obtaining finance or repaying a loan’.
The allowable costs generally include:
- Professional and legal expenses resulting from the negotiation of a loan and the preparation of documents
- Brokerage fees, introduction fees, and underwriting commissions
- Fees related to land register and search and valuer’s fees related to the security of the loan
- Commitment fees required to make a loan amount available
- Commission related to the guarantee of a loan
- Expense incurred relating to roll over fees
- Expenses incurred relating to the extension, replacement, or amendment of an existing loan (including fees for changes to the terms of the loan’s security)
By being able to claim any of these allowable costs, you can mitigate the following tax liabilities:
- Premium/discount due to the redemption of a loan
- Financing costs related to a loan
- Termination expenses for loans that are not activated
- Termination expense for loan finance repayment
- All other expenses related to a loan’s repayment, including reimbursement payments to lenders or payments incurred when making changes to the terms of a loan
Because of the many deductions to interest payable, companies can benefit most from tax mitigation by allocating as many fees and expenses to the financing of the property/estate as possible. All expenses that are directly associated with the property’s funding will, therefore, be tax deductible.
In cases when the property involves a substantial funding expense, companies can capitalise significantly on this tax deduction by ensuring that any professionals who work directly on the acquisition of the property allocate any applicable portion of their fees to the funding element. It is important, however, that you keep in mind that indirect legal and professional expenses cannot be deducted, so all expense must be in direct association with the funding of the property.
For most property purchases, the interest deductions often produce the most significant tax savings. Under UK law, tax traders receive tax relief for all interest payments that are ‘wholly and exclusively for the purpose of the trade.’ Keep in mind, that there is a separate set of rules, known as the ‘loan relationship provisions’, which dictate how companies are taxed/deducted for incurred interest. Although these rules differ, however, they essentially achieve the same results, providing companies with tax relief on profits earned.
In cases where your company has excess interest/financing costs, these costs are offset against income and subsequently carried forward/back.
Claiming capital allowances is another effective opportunity for tax mitigation. Capital allowances are available for any capital expenditures that are incurred due to ‘qualifying activity’ relating to plant & machinery.
For example, a trade is considered a qualifying activity.
As of April 2012, capital allowances are fixed at an 18% rate of the annual cost of plant & machinery, but you will likely receive 100% relief for expenditures that total less than £200,000. Because of this significant tax relief, companies can benefit greatly by calculating the costs that can qualify for plant & machinery allowances (at both the 100% rate and the 18% plant and machinery rate).
The most difficulty, however, arises when trying to determine what costs qualify as plant & machinery, and which simply apply to the structure. This distinction matters because expenses relating to the company’s building/estate structure are not tax deductible, while expenses directly relating to plant & machinery are.
Fortunately, the HMRC has compiled a list of expenses that could possibly qualify for capital allowances. Some of these key expenses include:
- Processing and manufacturing equipment; display equipment; storage equipment (including freezers and cold rooms); counters, checkouts and other related items
- Cookers, refrigerators, washing machines, dishwashers, bathroom equipment (including sinks, showers, baths, wash bins, toilets, sanitary ware, and similar items); and furniture
- Sound systems and installations related to the needs of qualifying activities
- Telecommunication, computer and surveillance systems (including wiring and installation expenses)
- Fire alarms, sprinklers, and other expense relating to fire detection and extinguishing equipment
- CO2 alarms
- Burglar alarms
- Safes or strong rooms for bank properties
- Partition walls
- Decoration in restaurants, hotels, or similar businesses that are intended for public enjoyment
- Advertising assets, such as signs, boards, and displays.
Whether these assets qualify for capital allowances is dependent on whether they are needed for the purpose of the trade.
You may notice that the careful allocation of the expense related to the purchase of a company building can result in dividends. Your company could lose capital allowances simply because the allocation and description of the funds involved were not appropriate or clear.
In order to protect themselves from this loss, many large companies are careful to ensure that purchase considerations are clearly outlined in the acquisition agreement and that all qualifying assets are explicitly stated (such as burglar alarms, fire alarms, etc.).
You must also keep in mind the professional fees, which can be claimed as capital allowances if they are directly allocated to the capital expense. So, for example, installation fees, electrical wiring fees, plumbing expenses, and other mechanical or electrical expenses relating to the installation/setup of plant & machinery can qualify for capital allowances.
In some cases, companies can claim allowances for 40-50% of the acquisition cost of a building using capital allowances for qualifying fixtures, plat & machinery, and installation costs.
Repair expenses after purchase
In general, if you buy a property or estate in poor condition and decide to conduct repairs/renovations, you can typically claim these expenses as deductions for tax relief. Even though you have recently bought the property before the repairs are conducted, these expenses are not usually viewed as capital expenses.
There are certain cases, however, where the HMRC may argue that these expenses are in fact capital expenses, and therefore cannot be claimed as deductions for tax relief. These are usually cases where renovations were included as part of the acquisition agreement, or cases where the estate was in such destitute conditions that it resulted in unreasonably high deductions.
Repair provisions that have already been arranged but have not been paid yet by your company can also be claimed as a deduction at the year’s end. These repairs are therefore considered a liability on behalf of your company and reduce your taxable profits.
Keep in mind that this relief only applies to incurred liabilities where you are obligated to pay, not simply any future repair plans.