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Capital Allowances and Residential Property

Capital Allowances and Residential Property

If a prospective claim looks too good to be true – it probably is. Steven Bone explains the rules.


This article appeared in the TAXline Briefing of the Tax Faculty of the Institute of Chartered Accountants in England & Wales in March 2012.


Many practitioners have been approached recently by purported specialists or their agents, encouraging capital allowances claims for residential property with shared amenities. Examples are buy-to-let houses of multiple occupation (HMOs), student houses or cluster flats.


Typically, it is claimed that plant and machinery allowances are available for assets in communal areas of the property (eg, corridors, stairs, halls and landings). Marketers suggest that some 5–8% of the purchase price may be attributable to plant in these areas. Often this is marketed along the lines of being “zero risk” or having a “100% success rate”.


As a result, a number of tax advisers have contacted us at the Capital Allowances Partnership Ltd, asking whether such claims are possible. Our view is that in most cases they are not.


It would be surprising if there was not initially a 100% success rate, because HMRC operates a “process now, check later” policy for claims. Statements and repayments are generated automatically, long before being checked by a real person. However, an investigation could follow up to 20 years after that initial claim was made and seemingly accepted by HMRC. A  taxpayer found to have made an inappropriate claim for allowances could not only see that claim rejected, but also be charged interest and penalties.

The Rule in Statute

The key issue to consider is what statute says. Section 35 of the Capital Allowances Act 2001 (CAA 2001) expressly prevents landlords (ie, any person carrying on a property business) from claiming capital allowances for plant or machinery that is provided for use in a “dwelling-house”. The term is not defined by CAA 2001, so takes its ordinary, natural meaning.


According to the Oxford English Dictionary, which is widely quoted with approval by the courts, a dwelling-house is “a house occupied as a place of residence, as distinguished from a house of business, warehouse, office, etc”.

HMRC Practice

For many years HMRC’s published view was simply that a dwelling-house was a building, or part of a building, that was a person’s home.


However, on 29 December 2008 HMRC updated its interpretation (Revenue & Customs Brief 66/08). Its intention was to provide clarity for student halls of residence, which had evolved considerably and had often become like flats with shared amenities.


HMRC’s view also extended to other types of multiple occupancy accommodation (for example, for key workers). Its revised view was that an individual bedroom was a dwelling-house, but shared rooms such as kitchens or television-watching spaces were not. Therefore, capital allowances claims would be accepted for plant in these communal areas.


As a result, a number of new capital allowances advisers emerged, aggressively marketing capital allowances claims to owners of residential properties with shared amenities (typically buy-to-let HMOs). In response, HMRC took further legal advice about the meaning of a dwelling-house.


Ultimately, terms used in tax statute must be interpreted and defined by the courts.  Therefore, their meaning may be drawn from other branches of the law.


Following further expert advice, HMRC published an updated view on 22 October 2010 in Revenue & Customs Brief 45/10. Based on a Town and Country Planning decision it concluded that the distinctive feature of a dwelling-house was its “ability to afford to those who use it the facilities required for day-to-day private domestic existence” (Gravesham Borough Council v Secretary of State for the Environment (1982) 47 P&CR 142).


Having taken that legal advice, HMRC updated its Capital Allowances Manual at CA11520 to read:


“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. In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact. [paras omitted]


“Cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/ diner and sitting room) are dwelling-houses [my emphasis]. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by [say] students is, in a sense, incidental.


“The common parts (for example the stairs and lifts) of a building which contains two or  more dwelling houses will not, however, comprise a dwelling-house.”

Time Limits

For capital expenditure incurred before 29 December 2008 HMRC confirmed it would only accept capital allowances claims made under the previous view in Revenue & Customs Brief 66/08 if filed before 22 October 2010.


For expenditure incurred on or after 22 October 2010 the updated guidance would apply in all cases.


For expenditure incurred between 29 December 2008 and 21 October 2010 inclusive, HMRC would accept claims made on either basis.


Therefore, a few taxpayers may still be in time to claim capital allowances on some properties under the Revenue & Customs Brief 66/08 view.


Otherwise, HMRC’s clear view is that it will not accept capital allowances claims for plant in any parts (communal or otherwise) of HMOs and similar properties. The initial purchase  or construction expenditure is simply capital expenditure that may not be written off for tax.


Instead of capital allowances HMRC permits the following:



The taxpayer can claim the wear and tear allowance or the renewals basis but not both.

Our View

The Capital Allowances Partnership Ltd’s view, and the consensus among other long-standing and experienced capital allowances specialists, is that HMRC’s stance is correct and in line with the intention of Parliament expressed through the capital allowances legislation.


Furthermore, it is a well established principle that HMRC interpretations and concessions do not have the force of law. Advisers who advocate claiming capital allowances for HMOs etc are doing so on the basis of a questionable and taxpayer-friendly interpretation of an HMRC interpretation. It relies on the argument that the Gravesham definition is somehow inapt, or that certain communal areas of the property (corridors, stairs, halls and landings etc) do not in themselves provide any “facilities required for day-to day private domestic existence” (such as cooking or washing facilities). Claiming capital allowances on those grounds is asking for trouble and no one should be surprised if it is unsuccessful.


Indeed, we consider that a taxpayer would have little prospect of success in persuading a tribunal or court that CAA 2001 permitted capital allowances to be claimed in most HMOs.


This contrasts with larger buildings containing two or more dwelling-houses (eg, traditional blocks of flats). In those properties it has long been accepted that capital allowances may be claimed for plant in communal areas (eg, lifts, or corridor fire detection equipment). This is because those common areas clearly fall outside the demise of the dwelling-houses (ie, the self-contained flats).


Even if it was possible to argue successfully that the corridors in a house with some shared amenities fell outside the demise of the dwelling- the potential plant assets would most likely be so modest as to make the exercise uneconomic.


The suggestion that they could be 5–8% of the purchase price sounds optimistic and improbable unless inflated valuations were used, or assets were included which should not be (eg, carpets where a wear and tear allowance has already been claimed).


Our view is that most buy-to-let HMOs and similar properties do not qualify for capital allowances. Consequently, making a claim is unlikely to achieve any tax savings and may well incur penalties.


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Tags for this article: capital allowances, plant, machinery, residential, buy-to-let, houses of multiple occupation, HMOs, cluster flats

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