Residential property and Capital Allowances – what can you actually claim on?

“Can I claim Capital Allowances on this residential property?” is a question we often get asked multiple times a week. The short answer is that most of the time we cannot, but there are certain circumstances and variations of residential property types whereby you can claim.

To understand whether or not a property qualifies for Capital Allowances, it’s important to understand HMRC’s view on what is eligible; Capital Allowances are available on qualifying plant and machinery that Is in commercial use, therefore common examples of properties that qualify include offices, warehouses, hotels, distribution centres etc.

On the other hand, “dwelling houses” are considered to be non-qualifying for Capital Allowance purposes.

“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.”

The HMRC manual states that a dwelling is considered to be made up of areas for sleeping, washing, and preparation of food, all of which are located together in a clearly defined area and not shared by additional households or tenants. With this in mind, the typical UK house will clearly not be eligible to claim.

A grey area presents itself however in the form of HMO’s, Furnished Holiday Lets (FHL’s), student accommodation and apartment buildings. So, let’s delve into these buildings in more detail:

Furnished Holiday Lets (FHL’s)

FHL’s are relatively easy to qualify, the HS253 guidelines state that to qualify as an FHL the property must fit all of the below criteria in the financial year:

• Must be situated in the UK or in the European Economic Area (EEA).
• Must be furnished.
• The property must be commercially let with the intention to make a profit.
• The total of any long term (31+ days) continuous lettings Is no more than 155 days
• The property must be available for letting as an FHL for at least 210 days
• The property must be let at the standard rate to the public for at least 105 days

If you let more than one property as a FHL, and one or more of these properties do not meet the letting condition of 105 days, you can elect to apply the letting condition to the average rate of occupancy for all the properties you let as FHLs.

Therefore, if you own a holiday let which meets the above criteria, you might be entitled to claim Capital Allowances.

HMO’s

HMOs appear to present the most confusion, as some might argue that the common areas between dwellings, such as stairs, landings, attic etc, would qualify for tax relief. However, the HMRC Manual CA11520 has stated their disagreement with this position. Therefore, we would not look to claim Capital Allowances on any HMO properties.

The specific statement from the manual is below:

“We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.”

Student Accommodation

Student accommodation’s ability to qualify is determined by a couple of factors, the first being whether it is deemed as an institution or not. In this instance an institution is an educational establishment which provides on-site accommodation solely for its own students, and whereby the kitchen and dining facilities are physically separate, and not always accessible from the student’s bedrooms. Student accommodation in said format will be eligible to claim Capital Allowances.

However, if the student accommodation forms clusters of flats or apartments which contain all facilities necessary for day-to-day private existence, i.e. in the same format as an HMO, then the building would be classed as residential and non-qualifying for the purpose of Capital Allowances.

For larger student accommodation blocks, i.e. halls of residence where there may also be access to a communal gym, or laundry facilities on site, there is a potential argument that these shared spaces would be eligible for Capital Allowances, including the potential for shared hallways and stairwells between residences to be considered.

Apartment Buildings

Apartment buildings also have the potential to qualify, this is based on the assumption that each individual apartment will be fully self-contained, therefore meaning that any plant and machinery in communal areas, (I.e. passenger lifts, carpets, fire alarms, CCTV, door access systems etc) could be considered when looking at whether a claim is available.

A key condition here is that the building owner must either own the freehold for all apartments and therefore receive rental income from each tenant, or that they have sold the flats on and receive a ground rent for the building (whilst taking into consideration that ground rents for new leases were abolished in June 2022).

Typically, we find that the percentage of the total expenditure for an apartment building that qualifies for Capital Allowances, is lower than that of a typical commercial property, with circa 5% of the total expenditure being eligible for Capital Allowances. However, for more sizeable apartment buildings this can still yield a substantial claim.

Other Residentials Properties

There are a few other properties which some might deem as residential; care or nursing homes are typically thought to be operating commercially, with them offering services such as on call care, cleaning and medical services. Likewise, other privately owned buildings such as hospitals, prisons, rehabilitation centres can also be viewed as being commercial due the services being provided to their residents.

Conclusion

Navigating the entitlement to Capital Allowances in the realm of residential properties can certainly be challenging, and in a world where more and more claims are being challenged by HMRC, it really highlights the importance of working with a specialist to ensure that any Capital Allowances claims stand up to HMRC scrutiny.

If you own or trade from one of the above property types, and you think you might be entitled to claim, then please get in touch with one of our experts at Bonham & Brook today, to see how we can help you!

To speak to a Capital Allowances specialist, please call 020 3523 9125 or email us at info@bonhamandbrook.co.uk.