There are many issues to consider, and I’ll start with a basic principle.
Section 11 Capital Allowances Act 2001 (CAA 2001) states that allowances are available if a person carries on a qualifying activity, incurs capital expenditure on the provision of plant and machinery (P&M) wholly or partly for the purposes of that qualifying activity and significantly in this instance, as a result of incurring the expenditure owns the P&M, HMRC’s manual covers this at CA20006.
We have a qualifying person in the company and a qualifying activity in the trade, the ownership is an issue.
Free standing equipment is straightforward, and plant and machinery allowances (PMA) will be available as normal, (annual investment allowance, first year allowances and written down allowance all possibilities.).
No Structures and Buildings Allowances will be due as, even if the company has an interest in the property, the building is a residential property – s270AA(1) CAA 2001.
An ownership issue arises with assets incorporated into the building and many of the assets you describe fall into this category as fixtures for example the solar panels, wiring and heating system.
Fixtures by law become part of the building they are integrated within or attached to and as a consequence, it is the owner of the freehold that owns the fixtures. The company therefore will not qualify for capital allowances as it is the directors that own the property.
The tax rules are however modified by the fixtures legislation and S176 CAA2001 allows a person to be treated as the owner of the fixture as a result of incurring the expenditure where they have an interest in the relevant land, this principle explained in HMRC manual CA26150
The fixtures legislation could therefore enable the company to qualify for capital allowances if it acquires an interest in the property (relevant land) such as a lease or a licence to occupy before it incurs the expenditure, the meaning of relevant land etc is explained at CA26100. Note that HMRC insist at CA26100 that a licence must be an exclusive licence for the company to have an interest in the property. This can create SDLT issues as although a licence is an exempt interest under s48 FA 2003, an exclusive licence may in fact be a lease. See also the comments below.
This would resolve the capital allowance issue on qualifying expenditure, and tax relief would be available on integral features listed at CA22320 and items not specifically disqualified by S21 CAA2001 for example walls, doors windows etc as detailed at CA22010.
Please also see list C of S23 CAA2001 that details the items that remain unaffected by the S21 exclusion, point 5 includes many items that your client may possibly install given the nature of the trade, please see CA22030.
The not so good news is that by acquiring an interest you should consider the following: –
The grant of a short or long lease out of a freehold may incur a capital gain and income tax liability, please see CA70950p.
As the company and the directors are connected persons, a Stamp Duty Land Tax (SDLT) liability may arise as a deemed market value transfer will apply on the land transaction as required by S53 Finance Act 2003, please see SDLT30220. Of course, similar issues may arise with Land and Buildings Transactions Tax and Land Transaction Tax in Scotland and Wales respectively.
Any private use of the assets of the company by its directors will attract a chargeable benefit in kind (BIK) with a class 1A liability on the company. For example, where the solar panels provide a benefit to the non-business part of the premises, please see expenses-benefits-assets-available-to-employee.
The fixtures legislation is a pretence for capital allowances purposes only and legally the fixtures belong to the husband and wife as the property owners so that spending money on the directors’ home creates a benefit in kind. See the First Tier Tribunal case of Richard Denny v HMRC [2013] TC02714. It is for this reason that a formal lease should be entered into with the company rather than a licence so that the company has a legal interest in the property and is therefore enhancing the value of its own asset – the leasehold interest. This results in the above mentioned SDLT implications. If the lease ends and the company has not received its “money’s worth” from its expenditure, then a benefit in kind can arise at that point.
The cessation of the lease would be a disposal event for capital allowances purposes and a balancing adjustment would be required, please see CA23240.
On any disposal of the property, the basement part and any other part of the property used exclusively for business purposes will not qualify for private residence relief in accordance with S224 TCGA 1992, this is explained in HMRC manual CG64690.
The directors will be taxed on the rental income received in excess of their costs, no NIC will be due on the rent and the company will receive a deduction for the rent providing it is on commercial terms and so wholly and exclusively incurred. Any amount paid to the directors in excess of an arm’s length commercial rate would be treated as a distribution.
Other non-tax issues that may arise are: –
• Where a loan is secured on the property, the lender should be consulted.
• The local authority should be consulted to ensure any necessary permissions are applied for.
• Business rates may apply.
• Property insurance requirements should be checked.
Conclusion
What the client may consider as a simple step and financially sound idea is a little more complex that should be considered carefully along with their long-term plans for the business and the property.
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