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HMOs and Capital Allowances – What You Need To Know

There has been a lot of confusion about whether Capital Allowances can be claimed on residential properties, and more specifically, HMOs. We hope to clear this up in the following article.

What are Capital Allowances?

Landlords can potentially claim back capital costs on items such as fixtures and fittings and offset them against rental income, or against Corporation Tax if operating via a Limited Company.

Certain conditions must be in place to be eligible for Capital Allowances.

Who should claim Capital Allowances?

Capital Allowances are most valuable to landlords with expensive refurbishments.

Who cannot claim Capital allowances?

Capital Allowances are not claimable for:

– Residential properties (without self-contained rooms)

– Single-let properties

HMRC classify the above properties as ‘dwellings’ or ‘dwelling houses’.

What about HMOs?

*HMOs = Houses of Multiple Occupancy

Capital Allowances are not claimable for:

  • HMOs* with several individual bedrooms, and where occupants share facilities (take me back to student digs at Uni… oh those shared kitchens and bathrooms… deep joy 🤢)

Capital Allowances are claimable for:

  • The common areas in HMOs that have an *entirely self-contained room; those that provide all the facilities required for day-to-day domestic living.

*An entirely self-contained room consists of cooking and washing facilities, and, most likely, a kitchenette, loo, and shower or bath.

To summarise…

The self-contained room is regarded as a ‘dwelling’ by HMRC and items cannot be claimed through Capital Allowances.

For HMOs with an entirely self-contained room, Capital Allowances can only be claimed for the common areas between each room.

Most HMOs will not qualify for Capital Allowances as most landlords follow the standard (ie several individual bedrooms with shared facilities) arrangement and therefore do not meet the self-contained requirement.

And Inherited Capital Allowances?

From 6 April 2014, Capital Allowances can only be inherited from a previous home-owner if an individual has claimed the allowance in a tax return prior to sale, and if the previous home-owner has formally agreed a value for Capital Allowances within two years of the transfer.

The seller will need to include the value of Capital Allowances in the sellers’ legal pack. The new buyer then ‘inherits’ it as part of the purchase.

Where a property is purchased, the new owner must be able to provide evidence that Capital Allowances can be claimed on inherited assets from a past owner.

You will not be able to claim Capital Allowances unless appropriate evidence is provided.

Assuming the property is a self-contained HMO, you can claim Capital Allowances for capital expenditure by the new owner for properties purchased after 6 April 2014.

Key takeaway points

  • Capital Allowances are not available for residential properties, except for HMOs with entirely self-contained rooms
  • For HMOs with a self-contained room, Capital Allowances can only be claimed for the common areas between each room
  • Most HMOs will NOT qualify for Capital Allowances
  • Capital Allowances can only be inherited from a previous home-owner if an individual has claimed the allowance in a tax return prior to sale, and if the previous home-owner has formally agreed a value for Capital Allowances within two years of the transfer.

Still unsure of something?

Please contact us here if you have any queries or need some friendly advice – we’d be happy to help.

Alternatively, come and visit us in Hazel Grove for no obligation coffee!

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