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Why investing in commercial property in 2013 could save you £103,226 in tax

First Published: February 2013 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

Most residential property investors shy away from investing in commercial property, despite there being strong tax benefits in doing so. From 1st January 2013, investors can claim up to £250,000 of allowances against their income tax bill – how much would your property plans be accelerated if you didn’t pay any income tax on £250,000 of income in 2013? This article looks at how commercial property can help you to save serious amounts of income tax – as well as being a sound investment.

I’ve heard of capital allowances – what are they exactly?

Unlike most (not all – see next month’s article) residential property investors, commercial property investors can claim capital allowances on their properties. Capital allowances are a tax allowance that can be claimed on the ‘plant and machinery’ within a property. When you buy a property, you buy the foundations, walls, and roof – but also, all the ‘kit’ within a property that makes it ‘work’ – items such as electrical, heating, sanitary and water equipment and systems.

The value of such assets can be established by a survey, and then written-off against income or profits – meaning a zero annual income tax bill potentially.

This sounds too good to be true – surely?

As of 1st January 2013, the ‘Annual Investment Allowance’ has been increased ten-fold from £25k to £250k. This is a quite remarkable increase and is designed to incentivise investors to buy business equipment and premises.

So, an investor with capital allowances of £250k could potentially claim back all the tax paid on their PAYE income, or their business or rental profits, up to that level. For a PAYE employee this would mean an income tax repayment of £103,226.

For a company earning £250k in profit, there would be a £50,000 tax repayment.

There is no time limit on when a claim may be made – however, new rules coming into play for 2013 / 2014 so consult your property accountant before making any new commercial property purchase. However, the £250k limit on tax relief only applies for 2 years – until 1st January 2014 – after which it will be reviewed.

But I don’t earn that much – is it still worth it?

Capital allowances are deducted off your gross income – so the tax benefit applies to the highest rate of tax payable.

This means that if you are a Higher Rate (40%) taxpayer, the cash benefit of a capital allowances claim is worth 40% of the value of allowances identified.

Also, these days there are two ‘sweet spots’ that mean the actual tax relief on a capital allowances claim could be a higher than 40% as follows:

£60k income

Child Benefit Allowance is clawed back between £50-60k income. However, a capital allowances claim to reduce gross income from (for example) £62.5k to £42.5k would save £8,000 income tax, but also £1,750 in Child Benefit Allowance (for 2 children), meaning effective tax relief at 49%

£115k income

The Personal Allowance is clawed back at the £100k gross income level – meaning an effective tax rate of 60% from £100k to around £116k gross income (2013 rates) – PLUS the loss of the Personal Allowance – so potentially a large tax repayment at stake.

But won’t this make me un-mortgageable to lenders – if I show no income?

Claiming capital allowances is purely an adjustment to your taxable income – it doesn’t affect the income you actually earned.

So, lenders will still lend, based on your PAYE P60, or business accounts.

Capital allowances are referred to as a ‘below the line’ tax adjustment. Lenders are interested in ‘the bottom line’ – meaning your income / profits – and tax adjustments in a standard accounts / tax return format are shown ‘below the line’ (profit). However, in our experience of speaking to lender underwriting staff, sometimes a qualified accountant certificate is required to confirm the tax treatment adopted – this is a
standard service request for many clients.

The tax benefits sound great – but isn’t commercial property risky?

This sounds like what people who don’t invest in residential property say about landlords! Commercial property leases are often 10-20 years in length, and are on a tenant ‘FRI’ (Fully Repairing and Insuring) basis. This means that whereas a landlord is regularly called upon by a residential tenant to deal with repairs, renew or end an AST, (or any manner of other queries!), commercial landlords can hand-over the keys and collect the rent for a decade or more!

Businesses require stability and so long as your initial due diligence indicates the financial risk of a new commercial tenant is acceptable, it is quite often the case that commercial property investors enjoy long stable periods of rental income with few costs.

A clever strategy – using your pension

An especially clever property strategy combines refurbishment of a commercial property (or buying below market value), plus a sale to your pension scheme.

First identify a commercial property that is ripe for refurb to uplift the value. Commercial property is valued mainly on the value of the commercial lease / tenant in place, so buying a vacant property allows a property to be bought cheaply.

Second buy the property, and complete a refurb that adds value to the property as a whole – for example, recent changes to the rules around doctors surgeries has meant a glut of these properties hitting the market – getting planning permission, and refurbing, to operate such properties as retail or office units can add serious value to the property.

Third claim capital allowances on the commercial property, to offset against your PAYE income or business profits fully in the year you buy the property to get tax relief at 40-60% depending on your income.

Four tenant the commercial property to establish the value of the lease – the better the tenant and longer the lease, the more valuable the property.

Five – and finally – transfer your commercial property into your pension for full market value – and therefore potentially get all your cash tied up returned to you via the pension, while still holding onto the asset and collecting the rent tax-free through the pension.


Commercial property has significant tax advantages – even more so as of 1st January 2013 – for investors that pay tax via their PAYE day-job, or have a profitable property portfolio or business.

While no investment should be made principally for tax purposes, many investors like commercial property for the tax benefits as well as for diversification reasons.

And, many residential investors even come to prefer commercial property once they understand how it works, and get used to regular large tax repayments.