By concession, if a taxpayer incurs capital expenditure on replacing plant or machinery in a trade or a property business, a claim can be made for a deduction for the replacement expenditure when calculating taxable profits.
This concession is withdrawn in relation to expenditure on replacing plant and machinery which is incurred:
(a) on or after 6 April 2013, for the purposes of income tax; and
(b) on or after 1 April 2013, for the purposes of corporation tax.
Implications for residential property investors
The above withdrawal has little or no effect for investors in commercial property. Capital allowances can be claimed for items of plant and machinery in the property and, from 1 January 2013, relief is given in full up to a maximum of £250,000 (until 31 December 2014). However, capital allowances are denied in the case of dwelling houses; in broad terms residential property.
HMRC’s draft revised guidance provides an example of where the withdrawal of the concession will apply:
“Sophia owns a number of residential properties that she lets. The properties are not furnished lettings.
The boiler in one property needs replacing. As the new boiler has to be located in a different position, Sophia decides to modernise the kitchen as a whole.
All the existing base units, wall units and sink etc. are stripped out and replaced, as is the fitted cooker and hob. New units of an equivalent quality are installed but in a different layout to allow for the re-location of the boiler, finally the kitchen is re-plastered and re-tiled.
The entirety is the house, not the fitted kitchen. The new kitchen is slightly different but it does the same job as before. Sophia has simply replaced the old kitchen with a modern equivalent. This is a repair and allowable expenditure.
Shortly afterwards, the fridge freezer breaks down and has to be replaced.
This is not part of the building but is an asset in its own right. Sophia has not repaired an asset; she has incurred capital expenditure on a new asset. As the fridge freezer is used in a dwelling house it is not qualifying expenditure for capital allowances purposes.”
The previous concession allowed a deduction for the cost of the replacement of the fridge freezer, which, from April 2013, will now be disallowed.