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Residential Capital Allowances (Buy-to-let HMOs etc.)

Landlord Capital Allowances for Buy-to-let Houses of Multiple Occupation (HMOs), Student Houses or Cluster Flats


We have often recently been asked whether landlords can claim plant and machinery (P&M) capital allowances  for residential property with shared amenities, such as buy-to-let houses of multiple occupation (HMOs), student houses or cluster flats.  Our view is that they cannot


We have become increasingly aware that owners of HMOs and similar properties have been aggressively targeted by new advisers claiming to be capital allowances ‘specialists’.  We have even seen this described as 'zero risk'.




In our view, both of these positions are mistaken. HM Revenue & Customs (HMRC) operates a 'process now, check later' policy. So statements and repayments are generated automatically long before ever being looked at by a real person. A taxpayer making an inappropriate claim for allowances could not only see that claim rejected, but could also be charged interest and penalties, up to 20 years after the initial claim has been made and seemingly accepted by HMRC.

Relevant law

The most important issue is to consider what statute says.  Section 35 of the Capital Allowances Act 2001 (CAA 2001) is clear.  It expressly prevents landlords from claiming capital allowances for any P&M that is provided for use in a ‘dwelling-house’.


For P&M capital allowances purposes the term ‘dwelling-house’ is not defined by statute.  Therefore, it takes its ordinary, natural meaning.  So the normal starting point is to look at what the dictionary says.  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.” 


However, ultimately terms used in statute must be interpreted and defined by the courts.  To the best of our knowledge, the term ‘dwelling-house’ has not been considered in a P&M capital allowances context.  Therefore, its meaning may be drawn from other branches of the law.


HMRC has recently taken expert legal advice about this.  HMRC’s view, published on 22nd October 2010 in Revenue & Customs Brief 45/10, is that the distinctive feature of a dwelling-house is 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 legal advice, HMRC’s considered view published in its capital allowances manual is that:


“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 … 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. 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.” (CA11520)

Our view

HMRC’s published view is clearly that the law does not permit, and HMRC will not accept, capital allowances claims for P&M 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 for residential property like HMOs, HMRC permits:




Our view, and the consensus amongst 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 published HMRC interpretations and concessions do not have the force of law (unlike statute and case law).  Advisers who advocate claiming capital allowances for HMOs etc are doing so based on a questionable and taxpayer-friendly  interpretation of an HMRC interpretation.  That is, arguably the Gravesham definition is somehow inapt, or some communal areas of the property do not in themselves provide any facilities required for private day-to-day domestic existence (eg, cooking or washing facilities). Claiming capital allowances on those grounds is inviting trouble and no one should be surprised if it is unsuccessful.


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 for 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 P&M in communal areas (for example, lifts, or corridor fire detection equipment).  This is because those common areas clearly fall outside the demise of the dwelling-houses (that is, the self-contained flats).


Even if it was possible to argue that the corridors in a house with some shared amenities fell outside the demise of the ‘dwelling-house’, the potential P&M assets would be so modest as to make the exercise uneconomic.  The suggestion that they could equate to 5-8% of the purchase price sounds optimistic, and only likely if inflated valuations were used, or assets were included which should not be (such as carpets, where the 10% wear and tear allowance has already been claimed).


Required disclosure

Of course, it should be pointed out that HMRC’s published stance is only its interpretation of the law.  And a properly informed and advised taxpayer (that is, having had the issues and risks adequately explained in advance) is at liberty to adopt a different view of the law from that published as HMRC’s view. 


However, published HMRC practice is also clear that if a taxpayer does adopt a different treatment, then the tax return should include a statement indicating that the taxpayer has not followed HMRC guidance.  Without this disclosure the taxpayer remains exposed to subsequent ‘discovery’ assessment.  Discovery gives HMRC powers to re-open a seemingly ‘agreed’ tax return, up to 20 years after HMRC’s normal time limits for enquiring into a tax return have passed.  Simply claiming capital allowances, without sufficient disclosure of what has been done, in the hope that HMRC will not notice it, is clearly not appropriate.  Indeed HMRC can, and does, enquire into returns and undertake targeted campaigns against particular sectors or matters of concern.


If a taxpayer is found to have submitted an incorrect tax return, they have to make up the tax underpayment (or pay back any tax repayment), plus interest and potentially penalties (which can be as much as 100% of the tax at stake).


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 incur penalties. 

Tags for this article: capital allowances, plant and machinery, residential, houses of multiple occupation, HMOs, buy to lets

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