PIM1095 - Cash basis for landlords: capital expenditure

Under the cash basis, deductions are allowed for capital expenditure, with extensive exceptions.

Broadly, deductions for expenditure of a capital nature are allowed for depreciating assets (those with an expected life of 20 years or less or a negligible value after such a time) that are not used in connection with the provision, alteration or disposal of land; cars; financial assets; businesses themselves; or education and training. No deductions are allowed for capital expenditure on assets used in ordinary residential properties – instead, replacement domestic items relief is available (see PIM3210).

More specifically, the legislation allows deductions of a capital nature, except for capital expenditure incurred on or in connection with:

  • Lease premiums
  • The acquisition or disposal of a business, or part of a business
  • Education or training
  • The provision, alteration or disposal of an asset for use in an ordinary residential property; that is, a dwelling-house that is not used as a furnished holiday letting. If a property is used as both an ordinary residential property and for another purpose, the amount can be apportioned.
  • Non-depreciating assets. Depreciating assets are those which within 20 years are either no longer of use as a business asset or have a value of 10% or less of the its original value at the time of the expenditure.

  • The provision, alteration or disposal of land. However, this does not exclude deductions for expenditure on depreciating (as defined above) property fixtures, which are allowed unless it is for the provision of:

    • Buildings
    • Walls, floors, ceilings, doors, gates, shutters, windows or stairs
    • Waste disposal systems
    • Sewerage or drainage systems
    • Shafts for lifts, hoists, escalators or moving walkways
  • Assets that are not acquired or created for use on a continuing basis in the property business.
  • Cars. These are defined in the Capital Allowances Act 2001 as mechanically propelled road vehicles other than motorcycles, vehicles for the conveyance of goods, or vehicles not commonly used as or not suitable for use as a private vehicle.

  • Non-qualifying intangible assets. Intangible assets are defined by FRS 105, but specifically include intellectual property. They are ‘non-qualifying’ if they are:

    • Intangible assets which are not due to expire within 20 years of the date of the expenditure, or where there is a right to renew or replace it so that it could exist for more than those 20 years.
    • Licences or other rights in respect of intangible assets which the taxpayer already holds.
  • Financial assets. These are any rights under or in connection with a financial instrument or similar arrangement.

Capital Allowances

As capital expenditure can generally be relieved in full as a deduction when calculating the profits of a property business under cash basis, capital allowances are not available in respect of capital expenditure. This includes the Annual Investment Allowance and First Year Allowances.

However, capital expenditure on cars may not be deducted under the cash basis. Instead, capital allowances continue to be available for cars in the same way as under the GAAP.

Mileage rates

An unincorporated landlord using either the cash basis or GAAP accounting may use mileage rates to account for business travel, which includes relief for the capital cost of a vehicle. Capital allowances cannot also be claimed if mileage rates deductions are claimed (see PIM2220).

Replacement of Domestic Items Relief

Deductions are not allowable for capital expenditure relating to assets used in an ordinary residential property, i.e. a dwelling-house not used as a furnished holiday letting.

Instead, replacement of domestic items relief is available when calculating the profits of a residential property business under the cash basis as it is under GAAP (PIM3210).

Disposal proceeds for assets on which a deduction has been given

As deductions are allowed for capital expenditure on some types of assets under the cash basis, rules are needed to ensure that the business is taxed on proceeds from the disposal of those assets. In specific circumstances, provisions bring any disposal proceeds relating to those assets into account as a receipt of the property business.

Disposal proceeds caught by the provisions must be treated as a receipt in calculating the profits of the property business in the year of the disposal. Any receipts should be proportionately reduced if only part of the expenditure was or would have been brought into account in calculating the profits of the trade under the cash basis.

There are two cases in which disposal proceeds are treated as receipts.

Case 1: Disposal Proceeds received during a Cash Basis Year

Where disposal proceeds or a capital refund are received for an asset in a year in which the profits are calculated using the cash basis, and a deduction has previously been given for an amount of capital expenditure in relation to that asset. The deduction must have been made:

  • Under cash basis rules where the expenditure was made during a year when the profits were calculated under cash basis.
  • Under GAAP, if the expenditure would have been deductible under cash basis. A deduction may have been made under GAAP as an incidental cost of obtaining finance, under replacement of domestic items relief or through capital allowances.

Example

Mr C enters the cash basis for the 2017-18 tax year. At the end of his final period in which profits are calculated under GAAP, he has unrelieved capital expenditure in a capital allowances pool, containing equipment he uses to maintain his property business. Transitional adjustments (PIM1096) are made to account for this, as capital allowances will no longer be available under the cash basis.

During the 2018-19 tax year, Mr C sells the equipment for £760. He must include the £760 as a receipt when calculating his 2018-19 profits.

Case 2: Disposal Proceeds received after leaving the Cash Basis

Where disposal proceeds or a capital refund are received for an asset in a year in which the profits are calculated under GAAP, and an amount of capital expenditure has previously been brought into account either:

  • Under a year when the cash basis was used, and had the cash basis not been used, it would not have been qualifying expenditure for capital allowances purposes, or
  • As an incidental cost of finance or using replacement of domestic items relief in a period in which the GAAP basis was used, but before a period in which the cash basis was used.

Example

Miss L replaces the white goods in a residential property she lets out during the 2016-17 tax year. She claims the expenditure of £650 as a deduction using replacement of domestic items relief.

In the 2017-18 tax year, she enters the cash basis. However, she decides to make an election to leave the cash basis in 2018-19. During that year, she decides to let out the residential property unfurnished, so she sells the white goods for £250.

As she used the cash basis for a period between buying and selling the asset, and claimed a deduction under replacement of domestic items relief, she must include £250 as a receipt in calculating the profits of her 2018-10 tax year.

Disposal Proceeds

For the purposes of the provision, ‘disposal proceeds’ means the proceeds from:

  • Whole or part-disposal
  • Granting of rights
  • Damages
  • Insurance Proceeds
  • Compensation
  • Refunds

Deemed Disposals

For the purposes of these provisions, some events are treated as a deemed disposal. Any proceeds arising from those events will be treated as a receipt if the circumstances meet Case 1 or Case 2.

  • If an asset ceases to be used for the purposes of the property business, the market value of the asset at the time of disposal is treated as deemed disposal proceeds.
  • If the non-business use of an asset increases, that proportion of the market value at the time of the change is treated as deemed disposal proceeds.
  • If a person who is a UK resident carrying on an overseas property business received a deduction for an asset used that business, and that person then moves overseas, the market value of that asset is treated as deemed disposal proceeds.

Where deemed disposal receipts are brought into account under the cash basis, the receipt is excluded from the consideration on disposal of an asset for Capital Gains Tax purposes. However, if the sum has been excluded from an earlier disposal of the asset, the consideration is considered for CGT.