An update on capital allowances for HMOs and flats
Rebecca Wilkinson – Property & Construction Specialist
Expenditure on altering or improving dwelling houses has never qualified for capital allowances, however landlords of furnished buy-to-let properties were previously able to compensate for this to some extent by claiming the wear and tear allowance.
The abolition of this allowance in April 2016 has been a blow to residential property investors, because whilst they are now able to claim a tax deduction for the cost of replacing furnishings on a like for like basis, this relief is much less generous than the wear and tear allowance which was equal to 10% of rental income, regardless of whether any expenditure was actually incurred.
For owners of single occupancy homes there is no choice but to put up rent or to absorb the additional tax cost. However, landlords who have joined the recent trend of converting single occupancy homes or other buildings into Houses of Multiple Occupancy (HMOs) or flats should seek advice, because they may actually be able to claim capital allowances.
Why might HMOs and flats qualify?
The reason that HMOs and flats might qualify for capital allowances whereas single occupancy homes do not lies in HMRC’s interpretation of what constitutes a dwelling house. Whilst individual rooms or flats are treated as separate dwelling houses, HMRC accepts that common parts are not. As capital allowances are only prohibited on dwelling houses, this means that claims can potentially be made on plant and machinery included in the common areas.
Due to this interpretation, savvy landlords were quick to identify the opportunity to claim allowances on kitchens and bathrooms where these were made into shared rooms within a house. Unfortunately, this opportunity has now been closed as HMRC has clarified its view that where individual rooms do not provide residents with the facilities required for every day private domestic existence, then the shared facilities including kitchens, bathrooms and living rooms will still fall within the definition of a dwelling house.
Whilst HMRC’s interpretation now precludes a lot of expenditure from qualifying for capital allowances, there is still scope to claim for items such as plumbing systems, electrical systems, lighting and lifts in common areas such corridors, hallways and basements etc. For small scale HMO conversions, the cost of having this expenditure reviewed by a capital allowances specialist may outweigh any tax benefit, but for larger scale conversions it could still result in significant tax savings and is worth discussing with a professional advisor.
HMRC’s Verdict Clarifying Capital Allowances
Owners of HMOs and flats may be interested to hear the conclusions of a recent court case [Tevfik v HMRC] which clarifies when capital allowances will be available to HMO owners and when they will not. The court case confirmed that capital allowances are not available on plant and fixtures within communal areas such as kitchens, bathrooms and living rooms that provide shared facilities, as these fall within the definition of a dwelling house. However, it also confirmed that in the right circumstances, allowances should be available on fixtures within common areas such as hallways, lifts and corridors etc.
For more information on how Houses of Multiple Occupancy (HMOs) might qualify you for capital allowances, contact Business Tax Partner Rebecca Wilkinson.