Year End Tax Planning: Capital Expenditure
As we approach the end of the financial year, it is important to review your financial and taxation position. Whilst in our last article in this year-end tax planning series, we took a look at corporation tax and profit extraction, in this article, we highlight some of the capital expenditure provisions that you might wish to consider.
Annual Investment Allowance (AIA)
AIA is a particularly valuable relief for businesses. 100% relief is given for expenditure on most types of plant and machinery and many fixtures in buildings.
The AIA limit of £1million on qualifying expenditure has been made permanent. The £1million limit is to be spread among related businesses.
Expenditure above this limit, or not qualifying for the AIA, will generally attract an annual capital allowance of 18% or 6% (depending on the nature of the expenditure) on a reducing balance basis.
Full Expensing
Full expensing provides a 100% first-year capital allowance on most plant and machinery (excluding cars) as long as they are unused and not second-hand and a 50% first-year allowance for special rate pool expenditure (e.g. integral features) without limit to the expenditure incurred.
Following the 50% relief in the first year for special rate pool expenditure, the balance is then subject to writing down allowances, currently at a rate of only 6% per annum. In contrast, AIA provides 100% relief in the year of expenditure on special rate pool assets albeit subject to the £1million limit.
The further point to consider is that disposals of plant and machinery, for which full expensing has been claimed, will be subject to an immediate balancing charge (i.e. a taxable receipt) based on the proceeds received. Balancing charges do not apply to assets acquired using the AIA.
Environmentally friendly equipment
Capital allowances can be claimed on expenditure on certain types of assets used in your business. Certain energy-saving, environmentally beneficial or water-efficient equipment and installations may attract immediate tax relief at 100%.
If you are planning to acquire or refurbish a business property, or to purchase plant or equipment such as heating or ventilation systems, check with the contractor or supplier whether the items you are installing qualify for the increased energy saving allowance.
The 100% tax relief is available for qualifying expenditure on zero-emission cars and for electric vehicle charge points.
R&D expenditure
As the name suggests, there are reliefs available for qualifying research and development expenditure. There is an increased scrutiny of these claims by HMRC.
New business premises
Relief is given at 3% per annum (i.e. over 33 years) on expenditure on new non-residential buildings (including conversions and renovations). This relief is known as Structures and Buildings Allowance.
Timing of disposal
The disposal of cars and other equipment made before or after the end of your accounting period may affect the taxable profit for the year.
Commercial property
If you are intending to purchase commercial property containing fixtures, seek advice to ensure that the maximum capital allowances are claimed. On purchase, any value attributed to the fixtures must be agreed by a joint election between the seller and the purchaser.
Capital Gains Tax: Business Assets Disposal Relief
Business Assets Disposal Relief (BADR)
BADR reduces the applicable rate of capital gains tax to 10% on qualifying gains up to the lifetime limit of £1million per individual taxpayer. The 10% rate increases to 14% on 6 April 2025 and to 18% on 6 April 2026.
BADR extends to sales of shares by certain individuals involved in running the business provided that for two years before the disposal of the shares, you own at least 5% of the ordinary share capital, exercise 5% of the voting rights, and are an officer or employee of the company.
For BADR purposes, the spouse or civil partner transferring the asset does not pass on their ownership period to the spouse or civil partner receiving the asset, so if the transferee does not hold the asset for the qualifying period independent to their spouse’s ownership period, the disposal will not qualify for BADR. But conversely, if the transferee does meet the qualifying criteria, it does not matter if the transferor does not.
BADR is also available in respect of gains made on the disposal of certain related assets.
There are restrictions if:
- There has been personal use of an asset within the business sold
- The asset was only used in the business for part of its ownership period
- Your involvement in the business is for a lesser period than the ownership of the asset
- The business has rented the asset.
There are further requirements in relation to the disposal of shares. In essence, these provide that you must be beneficially entitled to at least 5% of the distributable profits and assets for distribution to equity holders on a winding up and to the proceeds on a disposal of the whole of the ordinary share capital.
Protection from dilution was introduced from 6 April 2019. Where a future share subscription can result in existing shareholders with a share interest greater than 5% being diluted to less than 5% with the loss of BADR, protection of the gain arising before dilution will become available.
The detailed conditions for BADR are complex. Early and continual tax advice is essential to avoid losing the benefit of BADR.
We hope you have found the suggestions above helpful. In our next article in this series, we will be looking at pension contributions. As always, please contact us to discuss your circumstances with you.
These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.
