A question still on our mind, however, is whether real estate investors will be excluded from the new “super-deductions”?
The announcements made are clearly intended to increase business investment, assist post-pandemic economic recovery and give a boost to the UK’s productivity levels.
What are the capital allowance measures?
Businesses will now benefit from four significant capital allowance measures:
- The “super-deduction” – which offers 130% first-year relief on qualifying main rate plant and machinery investments from 1 April 2021 until 31 March 2023.
- Alongside, a 50% first-year allowance (FYA) for special rate (including long life) assets, again until 31 March 2023.
- A one year extension on Annual Investment Allowance (AIA) providing 100% relief for plant and machinery investments, up to its highest ever £1 million threshold, until 31 December 2021.
- Finally, Enhanced Capital Allowances (ECA+) will be available for expenditure incurred in Freeport tax sites until 30 September 2026. We intend to issue a dedicated blog on Freeports shortly so watch this space!
These super-deductions may significantly increase the total deductions a taxpaying business can claim, reducing the tax it pays on profits and potentially even creating losses in a chargeable period.
But are the super-deductions good news for property investors?
Firstly, the super-deduction is only available to companies subject to corporation tax. It is not relevant to unincorporated businesses.
Secondly, because both the 130% and 50% relief are “First Year Allowances” (FYAs), they are subject to the general exclusions of CAA 2001 s46. In particular, there is an exclusion for “plant and machinery provided for leasing”, meaning that expenditure incurred by property investors on assets in properties that are let out may be excluded from benefitting from the new allowance. It is not clear whether this was the Government’s intention or indeed whether it may reconsider. We await further clarification.
Finally, these reliefs are only for new, unused plant and machinery and not second-hand assets.
Making the Most of Super-deductions
On the basis you will benefit from the super-deductions, remember it is not a permanent concession. It will apply only to qualifying purchases between 1 April 2021 and 31 March 2023. Contracts entered into before 3 March 2021 will be excluded. To make the most of these allowances, it’s worth carefully considering the timing of any contractual arrangements and relevant company spend.
The corporation tax rate is set to rise from 19% to 25% in 2023 on profits over £250,000, with a 26.5% marginal rate effective on profits from £50,000 to £250,000. Capital allowances will therefore continue to become increasingly important as the incentive payback begins. There will also be some planning required to work out whether businesses carry back losses created by allowances or choose to carry forward to set against the 25% tax rates in later years.
We are expecting HMRC to publish further guidance by way of an FAQ document in relation to the new measures and we also anticipate there to be further detail set out on the Treasury’s designated “tax day” on 23 March. We will continue to update you when we find out more.