The Annual Investment Allowance (AIA), introduced in 2008 was meant to encourage investment by providing accelerated relief on fixed asset expenditure. This can therefore apply to any commercial property purchases that are treated as investment (where the intention is to gain a rental income for a significant period of time).
100% allowance to a certain limit
The AIA provides 100% allowance up to certain limit as long it is claimed in the first-year accounts during which the expenditure was incurred. From the 1 January 2016 to 31 December 2018 the limit was £200,000. Since 1 January 2019, the limit was increased to £1,000,000 and is set to return to £200,000 from 1 January 2021.
HMRC allow you to repair up to two years’ worth of previous accounts and apply the AIA if appropriate.
Use the Annual Investment Allowance or lose it
If the AIA (or any portion of it) is not used within the allotted time frame, the unused relief is lost. Only a certain percentage of the allowances can then be claimed yearly until they have been used up.
A practical example of how the allowance could work
Company X with Y/E 31st December 2018 purchases Property A for £1,000,000 in June 2018. CPA Tax after carrying out a survey identified £200,000 worth of claimable Capital Allowances (CAs). HMRC will allow Company X to amend the accounts by 31st December 2020 at the latest and apply the AIA.
If Company X amends the December 2018 accounts by 31st December 2020 ALL the allowances can be claimed during that period with any unused allowances brought forward and offset against future taxable profits.
For example, Company X had a taxable income of £100,000 for the 1/1/18 – 31/12/18 period and £100,000 for the 1/1/2019 – 31/12/19 period. On 30/12/2020, the December 2018 and December 2019 accounts were both amended and after applying the AIA the total tax due over both periods was NIL. Company X benefitted from a £38,000 tax refund straightaway.
If, however, Company X claimed the allowances one day later on 1/1/2021 they would only be able to amend the December 2019 accounts and miss out on the AIA. They would then have to claim a certain percentage of the allowances every year working on a reducing balance basis. For simplicity, Let us say this percentage is 12%, the tax saved over the first two years would be as follows:
December 2019 period
Claimable allowances – £24,000
Tax rebate received – £4,560
December 2020 period (accounts due by 30 September 2021)
Claimable allowances – £21,120
Tax saving made – £4,013
Total tax saving realised on 31/12/20 is £8573
Speak to CPA Tax to see if you can benefit
As you can see the accelerated relief available from claiming the AIA can be extremely beneficial from a cash flow perspective. If you have purchased any commercial property within the past 2-3 years and have not claimed, or are unsure about your position on, capital allowances, I would strongly encourage you to contact us for a review so you do not miss out on benefitting from the AIA.
DD: 0207 725 9942
M: 07402 916 180