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New guidelines for shared house owners have put a stop to most claims from property investors for capital allowances that can considerably slash income tax.
The taxman has changed the rules for houses in multiple occupation (HMOs) from October 22, 2010, by clarifying the meaning of the term ‘dwelling house’ for capital allowance claims.
Typically, a newly equipped HMO could attract a claim for about £30,000 of capital allowances.
Little has changed for buy to let owners who could not claim capital allowances for their business anyway.
These landlords could only claim capital allowances on equipment generally used by their business, not expenses on specific homes.
For instance no claim could be made on a washing machine in a rented house but capital allowances could be claimed for a computer in general business use.
Capital allowances are tax reducers aimed at stimulating investment in business that are also widely used by property investors to reclaim the costs of equipment like fire alarms and heating systems in shared homes.
The guidelines mean the taxman will challenge any claims for capital allowances on shared homes that include equipment in any tenant living space.
This effectively extends each tenants letting area outside their own room to shared kitchens, living rooms and bathrooms.
In a typical three or four storey shared house with six tenants living in their own rooms, the only space applicable for a capital allowance claim is now the hallways and stairs.
“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,” says the guidance.
“A block of residential flats is not a dwelling house, although the individual flats in it will be dwelling houses. A lift or central heating system serving the common parts of a building, which contains two or more dwelling houses, will not comprise part of either dwelling house. A central heating system serving an individual residential flat does not however qualify for a plant and machinery allowance (PMA).
“Expenditure on a central heating system serving the whole of the building containing two or more dwelling houses should be apportioned between the common parts, which qualify for PMA, and the residential flats or individual dwelling houses, which do not.”
Property owners should remember that HMRC guidance is just that – the taxman’s interpretation of the law and as such is not binding.
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