Capital Allowances –  Tax savings for HMO and Multi Let owners

by Property 118

11:11 AM, 10th May 2013
About 6 years ago

Capital Allowances – Tax savings for HMO and Multi Let owners

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Capital Allowances –  Tax savings for HMO and Multi Let owners

Council Tax CalculatorPart 2 of 2 written by Bill Loryman

The first reactions from Property Investors hearing about Capital Allowances are that they sound too good to be true and that,”surely my Accountant has identified them for me?”

Well, firstly they have been around since 1878 and are not a tax loop-hole or tax avoidance scheme. If you own a commercial business property, including an HMO or Multilet, you are entitled to claim Capital Allowances for them.

Secondly, the process of valuing the likely tax savings has to be completed by Capital Allowance experts who need to send Surveyors into the property to assess the “plant & machinery” – fixtures and fittings – assets etc. that are in the fabric of the building. They then prepare a typically a ten page report, with photographs, plans and a detailed analysis of all the qualifying assets that will satisfy the HMRC guidelines on submitting Capital Allowance claims.

This is a very specialised tax service that many accountants simply outsource in order to help their clients. A specialist will help you submit a claim, or work with your accountants to work out how much tax and money you can save, either as a tax rebate or off-set over future years.

• You need to be a UK tax payer. The investment property can be owned by a Company or a person. Whether the tax band is 20%, 40% or 50%, the higher rate you pay the greater the tax benefit and savings.

• The minimum value of a property really needs to be £150k but total value of portfolio qualifies. If you are buying this year or last you can qualify for AIA (Annual Investment Allowance) of up to £250,000 which can help make the claim successful and give substantial tax savings.

• Your accountant will claim for the furniture and general repairs but Capital Allowance surveyors look into what makes the building work, so the hidden assets unclaimed in the fabric of the building, items such as heating installation, wiring, lighting, fire alarm systems etc. are all valued using Quantity Surveying rules that confirm to the HMRC guidelines on submitting Capital Allowance claims.

Three of our recent examples are shown below:

Sussex Hearts Norfolk
HMO/Multi Let Purchase Price £280,000 £155,000 £205,000
Capital Allowance Identified £28,000 £12.500 £9,200
Net Tax Saved £14,500 £3,500(refund) £7,680(refund)

Clearly everyone’s tax situation is different and you will need to discuss preliminary details in order to get an illustration of the likely tax savings such as property address, type of business – Multi-let, HMO, student let, holiday let etc, date of purchase and the price paid plus the value of any improvement work you have carried out.

When you (and your accountant) decide to go ahead an engagement letter to be signed which gives the authority to contact the Land Registry to ensure no previous claims have been made. The property will then be surveyed for qualifying assets and a full report prepared for submission to HMRC.

The whole process typically takes about 10 – 12 weeks and should always involve your accountants. Fees for this service are usually generated out of a small percentage of the claim value on a ‘no claim – no fee’ arrangement.

Bill Loryman is the Managing director of HMO Tax Limited and has 20 years experience in the property world involving franchising, licensing, acquisitions and property development.

If you would like an illustration form of your likely tax savings on your investment property please complete your details below.



Comments

Phil Ashford

18:40 PM, 23rd May 2013
About 6 years ago

There is no information on why these claims are valid in this piece? Neither in Part 1.

How does the capital allowance claim get around the fact that the HMOs are residential in nature?

I understand the argument of the communal areas being non-dwelling areas. So, take a student HMO let to a group on a single AST. The whole of the HMO is a dwelling surely, since there is no communal area as the tenants do not have separate ASTs for each room. This would imply such a claim for HMOs on a single AST does not work.

If you let the rooms on individual ASTs and thus have a communal space similar to that described in the 'halls of residence' capital allowance guidance, then is the landlord not opening themselves up to council tax reassessment? If the landlord argues that each room is a separate dwelling, that means there is communal space on which to make a capital allowance claim which this planning relies on, does that not mean for council tax you also have separate dwellings? If so, each one may be deemed separately rateable? Thus landlords with professional HMOs with 5 beds could end up with the council tax valuation department demanding 5 lots of Band A council tax instead of 1 Band D? Looking at VOA it seems it is possible if little adaption has occurred to the rooms, but wondering if this HMO claim weakens any argument on a CT valuation. Is the definition of 'dwelling' different in CAA 2001 compared to

I am aware of such council tax battles at present...

Bill Loryman

10:48 AM, 29th May 2013
About 6 years ago

Paul, this is a complex area and requires working knowledge of HMRC briefing statements 66_08 & 45_10.

You may be aware that within CAA2001 it clearly states that no Capital Allowances can be claimed on 'dwelling houses'. Although HMRC have not defined what a dwelling house is, their respective briefing statements are their interpretation of what this constitutes.

A reasonable approach and one which we successfully claim CA's on is that the non-dwelling areas of a property, or communal areas that are not ' necessary for private domestic existence' and that contain qualifying Plant & Machinery, qualify.

Although HMO's are residential in nature, the qualifying requirements for council tax, rates and licencing are a very different set of requirements for that of tax relief. These properties according to RCB45_10 issued by HMRC on 22nd October 2010 can contain dwelling and non dwelling areas as we have proved numerous times.

If you would to discuss this further please contact Bill Loryman on: 01327 340 408
http://www.hmotax.co.uk

Phil Ashford

11:36 AM, 29th May 2013
About 6 years ago

Hi

Thank you for the reply, but it skirts around my point.

HMOs let out on a single AST, like many UK student houses... The whole house is a dwelling, is it not? Confirm or deny?

Thus, capital allowance claims are for specific HMO cases due to "the facilities required for day-to-day private domestic existence" clarification in Brief 45-10? Confirm or deny?

My CT point is an observation.

Jonathan Wilson

20:22 PM, 20th June 2013
About 6 years ago

I have read similar threads previously, but have never seen anyone who has actually completed and claimed these deductions comment on whether it was a worth while exercise. Can anyone provide some feedback or advice.

Mark Alexander

20:27 PM, 20th June 2013
About 6 years ago

Yours is a very fair question Jonathan. I am meeting Bill Lorryman next week and I will impress on him the importance of him asking some of his clients who have benefited from his services to post testimonials here.

I don't have HMO's personally but I have spoken to landlords who have and who have received huge tax rebates as a result of using serves such as Bill's. If only i could remember who they were I would drop them an email and invite them to comment here.

Therefore, I can't vouch for Bill, only because I've not met him or used his services, I'm sure he's great though, but I can tell you for sure that big tax refunds are available and being obtained by HMO landlords.

Phil Ashford

7:12 AM, 21st June 2013
About 6 years ago

Just for clarity. You mention a working knowledge of brief 66/08 and 45/10.

My queries above have been based on Brief 45/10, where HMRC set out to clarify the meaning of a 'dwelling house' in CAA01/35. It talks about the query I have been mentioning, and for readers I have quoted it below.

"A University hall of residence may be one of the most difficult types of premises to decide because there are so many variations in student accommodation. On the one hand, an educational establishment that provides on-site accommodation purely for its own students, where, for example, the kitchen and dining facilities are physically separate from the study-bedrooms and may not always be accessible to the students, is probably an institution, rather than a ‘dwelling-house’. But on the other hand, cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by students is, in a sense, immaterial.
The common parts (for example, the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house."

Thus, a HMO occupied by a group on a single AST, the dwelling house is the whole house, the whole HMO. Is it not? Therefore, there is no Communal Area with plant and Machinery in it on which to make a valid capital allowance claim. The whole HMO is a dwelling house and thus specifically excluded from the CAA regime.

Whilst Brief 66/08 was in circulation there was sufficient confusion so as to make this kind of Tax claim viable, but Brief 45/10 has shut the door on this. See the words in Brief 66/08:

"The updated view, as expressed in the revised guidance will apply in all circumstances in relation to capital expenditure incurred on or after 22 October 2010.
In relation to capital expenditure incurred on or after 29 December 2008 but before 22 October 2010 HMRC will either accept capital allowances claims in returns made in respect of communal areas on the basis of the view as set out in R&C Brief 66/08 or on the basis of the view as previously set out in CA11520 and CA23060.
In relation to capital expenditure incurred before 29 December 2008 claims made in returns for open years and filed before 22 October 2010 relying on R&C Brief 66/08 will also be accepted."

Phil Ashford

7:26 AM, 21st June 2013
About 6 years ago

In the last comment I meant to say, "See the words in Brief 45/10".

http://www.hmrc.gov.uk/briefs/income-tax/brief4510.htm

Mark Alexander

7:27 AM, 21st June 2013
About 6 years ago

Phil, I'm just a simple chap, please dumb this down a bit for me. Are you saying it used to be possible to claim tax back but isn't anymore because the loophole has been closed or have I misunderstood your point?

Phil Ashford

23:10 PM, 21st June 2013
About 6 years ago

Brief 45/10, the one written to clarify the tax claims being submitted because of the ambiguity of Brief 66/08, states:

"Returning to the example of student accommodation at paragraph four above, HMRC have concluded that the better view is that each flat in multiple occupation comprises a dwelling-house, given that the individual study bedrooms alone would not afford the occupants 'the facilities required for day-to-day private domestic existence'. In other words, the communal kitchen and lounge are also part of the dwelling-house."

I would like to understand, given the above from HMRC, how advice can be given that suggests for the average HMO, Plant & Machinery Capital Allowances per Capital Allowance Act 2001, can be claimed?

An average HMO is not in a building with other HMOs that share common parts. The average HMO has rooms that share common parts. The quote above, says such a setup is a Dwelling House. Dwelling Houses are specifically excluded from being able to make capital allowance claims in CAA 2001. So how is this planning right? It worked before because of Brief 66/08, but how does it work now since Brief 45/10 was published on 22 October 2010?

Bill Loryman

15:53 PM, 25th June 2013
About 6 years ago

Dear Phil, during our extensive compliance checks for each and every client we judge each case on its merits, and in accordance with HMRC's own Plant & Machinery guidance via its published toolkit - see here:- http://www.hmrc.gov.uk/agents/toolkits/ca-plant-machinery.pdf

We will only proceed if we are satisfied that the client is entitled to claim Capital Allowances on this property, as our compliance work establishes that no prior claims have been made on this property.
We will only proceed if we are also satisfied that the property is in a qualifying activity; being that it is a UK rental property, and held as a fixed asset of the owner with a view of long term profitability.
We will only proceed if we are also satisfied that it is a qualifying building. Our client informed us that the property is let to at least 2 unrelated households, and from our survey, the property consists of dwelling areas, for which we have not identified any Plant & Machinery, and non-dwelling areas.

As you will be aware, Section 35 0f CAA2001 states:-

“Expenditure incurred on the provision of plant or machinery for use in a dwelling house is not qualifying expenditure for an ordinary property business, an overseas property business or the special leasing of plant or machinery.
There is no definition of ‘dwelling house’ for the purpose of CAA01/S35 so it takes its ordinary meaning. A dwelling house is a building, or a part of a building. Its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence. In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but in difficult cases the question is essentially one of fact.
A person's second or holiday home or accommodation used for holiday letting is a dwelling house. The common parts of a building which contains two or more dwelling houses will not comprise a dwelling house, although the individual dwelling houses within the building will do so. A hospital, a prison, nursing home or hotel (run as a trade and offering services) are not dwelling houses."

Both RCB 66/08 issued 29th December 2008, and RCB 45/10 issued 22nd October 2010 seeks to expand and define what dwelling areas are.
As RCB 45/10 is clear that a property which consists of self-contained flats or rooms, which afford the inhabitants the necessary assets for ‘private domestic existence, plant & Machinery allowances may be claimed for the communal areas. For properties which consist of rented rooms, which share communal rooms, such as a lounge and kitchen, these are all deemed to be dwelling houses and as such Plant & Machinery cannot be claimed. The areas within the same property which are not therefore necessary for private domestic existence (access areas, storage, secondary reception rooms and so on) are still non-dwelling areas and as such can be claimed for.

I have sought to receive detailed guidance from HMRC CT & VAT Offices in Parliament Street on this matter a number of times, but have not received any response.
As such, I take the reasonable approach that Plant & Machinery may be claimed on all areas which are NOT ‘necessary for private domestic existence’ within a multi-occupancy property as being those which are ‘non-dwelling areas’.

RCB 45/10 highlights that certain rooms can be part of the 'dwelling house' and others are not. The phrase 'each flat comprises a dwelling house - comprises, or "consist of, made, contain, include" a multi-occupancy flat can include a dwelling house and non-dwelling house.

It is also important to see what the guidance did NOT say. It doesn't say that the whole of a multi-let is a dwelling. It doesn't say that no claims are allowed, indeed even at the bottom of the 45/10 brief it confirms that claims will be accepted under these new rules.

For those premises which comprise self-contained rooms, it is very clear, and for those properties which are HMOs, we separate the ‘dwelling house’ part of the building and the non-dwelling house part, as per s.35 CAA2001 and calculate a claim for plant & machinery.

Hence, I can confirm that the claim includes ONLY the valuation of the Plant & Machinery on the ‘non-dwelling’ areas of the property in question.

It is important also to state that we have of course been challenged by various HMRC inspectors across the country, and upon discussion of our interpretation and reasonable approach, they have accepted and agreed each CA claim we provide.

It is also important to say that some properties will not qualify, and as such no CA's can be claimed, some flats in multiple occupancy are a prime example here, but the majority of student & professional type houses and larger establishments do qualify, and we have a great track record to show.

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