Guest Blog: Why Landlords Should Not Write Capital Allowances Off

By Steven Bone, director, Gateley Capitus

As a result of a government U-turn following the March Budget, commercial property landlords that are companies will now be able to benefit from a generous new tax break.  This will lower tax bills for commercial property landlords who are constructing new buildings or extending, adapting, or refurbishing existing buildings, or installing equipment.  A wide range of property uses may potentially benefit including amongst many others – offices, warehousing and logistics, hospitality and leisure, care homes and clinical surgeries, retail centres and shops, and furnished holiday lettings.

For almost 80 years the UK capital allowances system has given tax relief for longer-term ‘capital’ investment in business property and equipment (in tax jargon called ‘plant and machinery’).  And because ‘plant’ has a special meaning for legal purposes, it means that money spent on many everyday fixtures commonly found in buildings qualifies for tax relief.  For example, the ‘main pool’ capital allowances category includes furnishings and fittings, sanitary appliances, fire alarms, mechanisms like door opening and closing systems and so on.  And the ‘special rate pool’ heading includes electrical power and lighting, hot and cold water, heating systems, ventilation and air conditioning systems and lifts.

One of the major eye-catching announcements in the Chancellor’s Budget day speech this year was Mr Sunak’s creation of a ground-breaking 130 per cent capital allowances ‘super-deduction’ for main pool plant together with a 50 per cent ‘SR allowance’ for special rate pool assets.

The super-deduction means that for the first time ever, a company making capital investment in main pool plant or machinery, will be able to lower its profits for tax by nearly a third more than the expenditure incurred.  That translates in real terms to lowering the company’s tax bill by nearly a quarter of the money spent.

However, whilst the super-deduction generated many favourable media headlines, our subsequent close examination of the detailed legislation identified that a few surprises were lurking.  These included that:

  • The new allowances are only available to companies and not other property owners such as sole traders, partnerships, or limited liability partnerships;
  • The plant and machinery must be new and unused, which means second-hand assets are not eligible such as existing assets when freehold or leasehold premises are bought, and
  • The money must be spent between 1 April 2021 and 31 March 2023 under a contract that was made on or after Budget day (3 March 2021). So, the new allowances are a time-limited opportunity.

But perhaps the greatest surprise of all was that the super-deduction and SR allowance interacted with an obscure existing piece of capital allowances legislation that prevents companies benefitting from these better capital allowances when plant or machinery is provided for leasing.

Unfortunately, the way this operates in practice meant that landlords fell foul because they were deemed to be leasing plant and machinery with the building.  This meant that neither the super-deduction nor SR allowance would be available to landlords.

Initially, we at capital allowances specialists Gateley Capitus were puzzled by this and wondered whether this unfortunate interaction with a not well-known section of capital allowances statute was just an oversight. We could see no obvious reason why the Government should wish to discriminate against landlords in this way.  After all, the Chancellor’s stated intention was to stimulate investment to boost the economy, and expenditure by a landlord would generate economic benefits just like investment by anyone else.  Indeed, expenditure by property investors could boost the construction industry and its supply chain as well as potentially providing many other benefits such as improving business premises, changing their use or advancing their environmentally friendly credentials.

So, we approached government officials in the hope of identifying a mistake and prompting a change of policy.  However, the initial response, whilst providing helpful clarification, regrettably made clear that the legislative effect was deliberate.  We were told that landlords were excluded because the intention of the new allowances was to provide an incentive for businesses to buy new plant and machinery and bring those assets into long-term productive use in their business and the economy. But where plant and machinery were provided for leasing, the company entitled to the allowances (i.e. the landlord) was not the company who would be bringing the assets into productive use (i.e. the tenant).

That struck us at Gateley Capitus as a disappointing and rather arbitrary and unfair distinction to make.  So we were delighted to hear that the Government has now reflected on its position and on 20 May tabled an amendment to the Finance Bill, which if it becomes law (which is highly likely), will allow ‘background plant’ to qualify for the super-deduction and SR allowance.  Background plant is assets that are fixed to a building and leased with it, and of a type that you would normally expect to find in a building to improve the functionality of the building.  So, it covers the many ordinary fixtures in buildings that otherwise would have qualified for the new allowances in an occupier’s hands but not a landlord’s.

This is a significant step forward in making things fairer for landlords and a fantastic opportunity for them to invest in their property.