The Basics of Capital Allowances
Capital allowances are a valuable form of tax relief available to anyone incurring capital expenditure buying or building commercial property.
They are a right, not a privilege and are best thought of as a reduction in the purchase price of the assets. They significantly boost the post-tax yield on an investment.
Capital allowances and related reliefs are available when:-
- Commercial property is acquired for investment or occupation;
- Commercial new-build, extension or fitting-out/refurbishment works are undertaken;
- Business equipment is purchased;
- Contaminated land or buildings are cleaned-up;
- Research and development is undertaken, or R&D facilities are bought or built.
Capital allowances are available for two reasons:
Firstly, accounting depreciation is not an allowable deduction for tax purposes. However, capital allowances are available instead, which give a tax deduction under rules set-out by Government (this is why capital allowances are sometimes called 'tax depreciation').
Secondly, because capital allowances provide valuable tax breaks, the capital allowances system is used to provide incentives to invest in socially, economically or environmentally desirable assets. There are many recent examples of this.
They are a tax adjustment only and have no effect on the profits shown in a business's financial accounts or on the market value of property. Claiming capital allowances will not increase any capital gain if the property is ever sold.