Conversion inside a Ltd company - can I claim Annual Investment Allowance??

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    Conversion inside a Ltd company - can I claim Annual Investment Allowance??


    I bought a house which I had owned for several years as a BTL with my limited company (no issues here as had an independent valuation to demonstrate that it was at market value, etc). I wanted to crystallise the capital gains by using mine and my wife's personal CGT allowance.

    I then converted this house into two flats at a cost of approx £15k - I know that this is cheap but it lended itself easily to the conversion. At the time I was hoping to sell it after the conversion, but there was little / no interest despite advertising it so I have kept it as a nice gross 10-12% yield investment (cf the 8-9% that I was getting before the conversion) - although with a bit more effort as double the number of tenants.

    The house was in a tired condition and the majority of the conversion costs was refurbishment to make it ready for letting - painting, new carpets, repairing the roof, etc. There were however some costs which are due for the conversion - ie sound insulation on the walls, stripping out the old kitchen which was ancient and replacing it with a new shower room, and putting in a couple of kitchen units in the lounge of each flat, as well as the architect's fees, planning and building regs. I had a single invoice from the builder and have discussed with him about the breakdown (although not documented) and am pretty sure that I can come up with a fair and justifiable estimate of the costs of the conversion versus refurbishment (after all the amounts are small so I doubt that HMRC would be interested anyway but I want to be correct vis a vis paying the right amount of tax).

    My understanding is that especially since the company does other property related activities there is no problem with my simply writing off 100% the refurbishment costs as expenditure in my tax year. This is after all a direct business expense of letting and on querying HMRC about how to fill in rent from my property they told me to put it in as turnover. This is despite the refurb costs being a bit more than the rent in that year, and my company making an overall loss as I have made provisions for a bad debt. I am happy to just carry the tax loss forward to this current year which so far is profitable.

    What I am wondering about is how to treat the costs which are related to the conversion. I had initially planned to treat these all as capital costs and so simply treat them as an addition to the property value and not claim any depreciation or capital allowances - as even if I could claim these, the amounts seemed to be so small that it wouldn't be worth the effort.

    But I have been looking at the AIA (Annual Investment Allowance) and this allows 100% allowance for plant and machinery. Before I submit my annual accounts and tax return can I just double check my understanding that as per AIA and in fact all of Capital Allowances do not apply for residential lettings. I had seen that for instance sound insulation counts as plant and machinery but I guess that this is only for non residential letting.

    I don't use an accountant.

    You definitely need to consult a qualified tax accountant to reply to your questions. The accountant's charge is an allowable expense item against your rental income.

    I also have read the plant and machinery allowance does not apply to residential property income. But you should not rely on any free advice coming from this forum as being 100% correct because forum contributors are just lay-persons.


      Thanks for your advice


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