If you own investment property you should be aware that the deadline for claiming capital allowances on investment property is 31 March 2012. So now is the time to make sure you have maximised such claims.
There is a very wide range of fixtures and fittings that can be included in these claims, including toilets and cold water pipes. As such, there are some large claims that can be made.
However a recent discussion with a property rental client in Merseyside has outlined a potential pitfall in making such a claim. He has been approached by a firm specialising in making capital allowance claims, who have promised him a significant tax refund if he will allow them to make a claim (for a fee of course).
The problem is that he hasn’t paid tax for many years, given that his property portfolio is highly geared and he makes a rental loss year on year. The fine print of the capital allowance legislation restricts the set-off losses generated by capital allowances in rental property businesses to profits of the rental business – and not against other sources of income.
This is different from the rules applying to trading businesses, who buy a property to trade from and who then make a loss because of a capital allowances claim. This loss can be set off against all sources of income for the year of the claim – and indeed can be carried back to mop up other profits if the loss cannot be relieved.
If the property rental client were to make a claim, then the loss that would be generated could only be carried forward against future rental income and the amount claimed for capital allowances would have to be deducted from the initial cost of the property, when computing the capital gains tax liability at the point the property is sold. This may lead to the unfortunate situation where a claim may actually increase the tax burden for the client.
So don’t be fooled by the promise of a fat tax refund, without first checking your own particular circumstances.