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Capital allowances cannot generally be claimed by landlords who let residential property. They are more likely to be claimed by landlords of commercial property (e.g. hotels), as ‘plant and machinery’. The claim encompasses such assets as lifts, central heating and air-conditioning. Furnished holiday lettings are deemed to be a ‘trade’ and, as such, capital allowances can be claimed.

The Annual Investment Allowance (AIA) is a 100% allowance on the cost of investment in standard plant and machinery up to a set limit. For expenditure incurred before 31 December 2015 the limit is £500,000. As from 1 January 2016 the allowance has been fixed at £200,000. Expenditure in excess of the limit is dealt with under the standard ‘writing down allowance’ rules, any unused AIA being lost.
Thus, any expenditure in excess of the AIA amount should be delayed until the next tax year.

Transitional rules apply for those companies whose tax period spans the operative date of 1 January 2016 on a proportional basis.

Example:
A company has an accounting year ending 31 March 2016. On 31 July  2015 the company invested £650,000 in refurbishing a substantial apartment block of furnished holiday lettings – replacing kitchens, bathrooms and security systems.

The maximum entitlement to AIA under the transitional rules will be £425,000 (i.e. (9/12 x £500,000) + (3/12 x £200,000)).

Of the amount invested, £425,000 will be eligible for AIA, the remaining £225,000 receiving tax relief at 18% a year on a decreasing balance basis under the writing down allowance rules.