Capital allowances claims are applicable to a wide range of activities, including property purchases, where they are are of benefit to businesses purchasing a property to use as their business premises, and to investors who buy property to rent out. However, they are not well understood.
Increasing regulation and the perceived high tax burden are the main reasons for landlords exiting the property market in their droves. But the reality is that most are not claiming anything near their full entitlement on capital allowances, making this an area where accountants can share specialist expertise.
While property purchasers often claim allowances on chattels such as loose furniture and white goods, these are insignificant in comparison to the more valuable claims for qualifying property fixtures, which are often completely overlooked.
The plant and machinery portion of a purchase qualifies for wear and tear allowances
The purchaser of existing property will generally be entitled to claim capital allowances for a proportion of their purchase price, yet such claims are often not made. These relate to plant and machinery qualifying for wear-and-tear allowances (WTAs), which are claimed over eight years at 12.5% per annum.
Entitlement to claim
WTAs, which are the most widely available form of capital allowances, can be claimed against both trading and rental income, and they apply to residential rentals and all forms of commercial property. Both corporate entities and income taxpayers can claim.
Where an existing property is purchased, section 311 TCA 1997 entitles taxpayers to undertake a just apportionment claim on a property purchase, where specific conditions are met. This simply means that a qualifying purchaser of a second-hand building is entitled to claim capital allowances on some of their property purchase expenditure. The qualifying amount equates to the proportion of the property purchase attributed to plant and machinery. The proportion relating to land and buildings is ineligible.
Examples of qualifying items include boilers, fans and many other items found to qualify across 150 years of case law.
While Revenue’s published guidance is brief, it does confirm that, where a purchase contract does not distinguish between the building and the plant and machinery, it is reasonable to apportion the value of plant and machinery to the property purchase price. Revenue state that such an apportionment can only be justified by preparing a professional valuation.
Capital allowances should only be claimed where all legislative entitlement criteria are satisfied
The qualifying amounts for a property purchase vary and depend on several factors including entitlement, the purchase price, property type, location and specification.
The graph below provides an indication of the likely ranges that could apply for different property types.
The ranges shown above are from 0% to the upper end of the range and relate to plant and machinery fixtures. Capital allowances should only be claimed where all legislative entitlement criteria are satisfied and where the correct level of substantiation is provided to back up a claim.
This a niche area of tax law that stretches the reasonable knowledge limits of general advisers
Subject to entitlement, a claim of between €40,000 and €80,000 is potentially available for a €400,000 rental property purchase. For a €2m purchase of a bar, a claim of between €400,000 to €600,000 could be available, and for a €3m office property purchase, a claim could be made of up to €1m. (These examples are illustrative only, and are subject to satisfying legal entitlement and preparing comprehensive substantiation to back up any claim.)
Why the hesitancy?
Many taxpayers claim for loose items and assume that this is their full entitlement, whereas such claims represent little more than a fraction of the potential claim. It does not help that complex legislation and case law, and the lack of guidance from Revenue, make this a niche area of tax law that stretches the reasonable knowledge limits of general advisers.
Additionally, there is a perception that all property tax incentives have long been abolished, such as section 23 and similar schemes that were available during the housing boom.
The first and most important step is to determine whether entitlement exists under legislation
Finally, where opportunities to claim are identified and the legislation and case law is interpreted correctly, the next challenging step is to quantify the value of the claim accurately. This requires a very specific skill set.
A question of value
Before quantifying the value of any claim, the first and most important step is to determine whether entitlement exists under legislation. This requires both tax and surveying expertise to correctly identify qualifying items and to attribute accurate values that can be substantiated for tax-compliance purposes.
The approach that is generally recommended involves preparing a land valuation and a reconstruction cost estimate for the building, including the plant and machinery fixtures attached to the property. The land, building and plant and machinery valuations are then apportioned to the property purchase price, with only the latter allocation qualifying for capital allowances.
Due to the specialist skillset required for preparing purchase claims, members of the Society of Chartered Surveyors Ireland (SCSI) are often relied upon. Chartered taxation surveyors are a specialist grouping within this body who specialise solely in capital allowances advisory; the SCSI recommends that only members with this specialist designation should prepare capital allowances claims.
Risky business
Valuable tax savings are potentially available through these claims; however, the risks should not be underestimated. Revenue will expect to see detailed substantiation for these claims and it is advisable to compile and retain relevant documentation and workings.
Revenue will rightly reject claims that do not satisfy legal entitlement, and incorrect or aggressive claims tend to be thoroughly audited during Revenue interventions.
