In his Budget speech on 29 October the Chancellor of the Exchequer, Philip Hammond, announced significant changes to the UK’s capital allowance regime. Briefly, these changes were:
- The introduction of a new Structures and Buildings Allowance giving tax relief for the cost of non-residential structures and buildings;
- The reduction of the “special” rate of capital allowance for plant and machinery from 8% to 6%; and
- A temporary increase in the Annual Investment Allowance from £200,000 to £1,000,000.
Structures and Buildings Allowance (“SBA”)
Since the phasing out of the Industrial Buildings Allowance (“IBA”) in 2011, the UK’s tax system has not allowed relief for the cost of construction of buildings or structures. In relation to expenditure incurred on certain buildings and structures on or after 29 October 2018, SBAs will now be available.
SBAs will be allowed on a straight line basis at the rate of 2%, so that the cost of a qualifying building will be amortised over 50 years for tax purposes. Unlike IBAs, SBAs will not result in any balancing allowances or charges when a property is sold – rather, the unexpired SBAs will simply be passed on to the purchaser.
Relief will be allowed on the cost of construction of commercial premises held for the purposes of a wide range of businesses, provided that such businesses are within the charge to UK tax. The relief will be available even if the building in question is situated outside the UK. Relieved costs will include the direct costs of bringing the structure or building into existence, including certain costs of converting an existing building, demolition and land alterations. Allowances will only be given once the building is brought into use and no part of a building used as a dwelling will qualify for SBAs.
The special rate of capital allowances
Certain classes of plant and machinery, e.g. the integral features of buildings such as water systems and ventilation systems, are only eligible for capital allowances at a reduced annual rate (the “special rate”) of 8%, rather than 18%. With effect from April 2019, this special rate will be reduced to 6%.
The Annual Investment Allowance (“AIA”)
The AIA is effectively a 100% capital allowance available to businesses on a certain amount of capital expenditure on plant and machinery each year, regardless of whether that expenditure would otherwise qualify for capital allowances at the special rate of 6% or the general rate of 18%. For a temporary two year period commencing on 1 January 2019, the AIA will be increased to £1,000,000. (The AIA will be unavailable in respect of expenditure that would otherwise qualify for the new SBA.)