When it comes to tax savings, there is a hidden treasure trove waiting to be discovered: capital allowances.
Although it may sound a little dry, capital allowances could be the key to unlocking substantial tax benefits and playing a crucial role in effective estate planning. Nicholas Duffy, Investment Manager, speaks to David Gibson, who has advised on capital allowances for over twenty years, to find out more about this tax relief.
In the world of taxation, capital allowances refer to the deductions that can be made on eligible capital expenditure, including machinery, equipment, cars, yachts and on purchasing, developing, refurbishing every type of property, excluding private dwelling houses or flats. It is also available to tenants that occupy commercial space and incur expenditure fitting out their space.
By claiming capital allowances, family offices, individuals and companies can offset these expenditures against their taxable income, effectively reducing their tax liability. Property investment yields can typically be increased by 0.25% to 1% through capital allowances alone.
For individuals or partnerships, the saving equates to £45,000 in every £100,000 of qualifying expenditure and for companies £25,000 in every £100,000 of qualifying expenditure.
Instead of viewing capital allowances as a complicated tax process, it should be embraced as an opportunity to save substantial amounts of money.
These tax savings can then be allocated to other investments or wealth preservation strategies.
The savings are not restricted to just current or future expenditure; you can go back in time and dig up forgotten treasures in relation to historic expenditure. By working with a specialist capital allowances advisor you can review your past investments or expenditure and uncover hidden opportunities for retrospective claims.
While accountants might be the unsung heroes of the financial world, tirelessly crunching numbers and navigating complex tax regulations, they cannot be an expert in everything – much like how GPs refer patients to specialists for specific treatments.
One reason for the oversight is the complexity of the capital allowances regime. With ever-changing legislation, intricate rules and numerous qualifying criteria, it's no wonder accountants occasionally struggle to keep up with the intricate details.
As they navigate the maze of tax regulations, they may unintentionally overlook the specific opportunities that capital allowances provide. It's like searching for a needle in a haystack, with the needle being tax reliefs and the haystack representing the vast array of tax legislation.
Furthermore, the dynamic nature of businesses and their investments plays a role in the oversight. The focus is typically on managing day-to-day financial operations, balancing books and ensuring compliance.
With limited time and resources, it can be challenging to explore and identify every potential avenue for tax savings, so the golden opportunities that capital allowances present may inadvertently get missed.
While capital allowances may not seem like the most glamorous topic at first, by exploring the potential tax benefits available and making strategic use of capital allowances, you can save on taxes, enjoy the luxury items you love and continue building your wealth.
Here are some tips to unearth the treasure:
The world of capital allowances is constantly evolving, with new regulations and allowances being introduced regularly. But do this in tandem with point 2 below.
Engage with a specialist
Capital allowances can be complex, and navigating the intricacies of tax legislation can be challenging. To undertake an initial review of the potential tax savings should not cost anything so there is no need to worry about additional unnecessary cost which doesn’t provide a return on your money.
Plan investments strategically
When making new investments, consider the potential capital allowances available before committing to a purchase to help you make informed decisions that maximise your allowances. For example, if you are considering purchasing commercial property, it is highly recommended that you seek specialist advice on contract wording to be included within any agreement.
Claim retrospective allowances
It's not only about taking advantage of current allowances; you may also be eligible to claim allowances on past capital expenditure. It is not necessary to retain full documentary records of all costs incurred over the past 30 years; a specialist advisor will be able to navigate you through the waters and identify what information is required to support a successful submission to HMRC.
Capital allowances provide exciting prospects for family offices, property owners and occupiers. By understanding and leveraging these allowances, substantial tax savings can be achieved. Admittedly, navigating the world of capital allowances can be complex, but with the right guidance and expertise, it is possible to unearth that hidden treasure.
David Gibson is a Director at Veritas Advisory, which provides specialist capital allowances advice.
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