Landlords’ headache over tax relief tweaks

For the most part, today’s university students are spared digs like those endured by the fictional students of Scumbag College in “The Young Ones” – but the taxman now says fixtures and fittings bought for their flats should be denied tax breaks to reflect this.

The taxman is tweaking capital allowances rules in a way which will impact student homes and, considering how many students live in university accommodation or rent big houses, this could represent a seismic change.

The restrictions will not only affect a large number of the two million people studying at UK universities, the prospect of higher rents also could also deter   others thinking about a degree.

On the average student flat or house with six tenants and communal areas, advisers say a conservative estimate for a capital allowance claim on plant and machinery expenses (cookers, fridges and boilers etc) would be £2,000. 

The allowance withdrawal would increase landlords’ tax bills in the region of £400 for those paying 20% income tax to £1,000 for 50% taxpayers.

It could stifle the buy-to let market advisers say and there is the very real prospect of the additional costs being passed onto students.

HMRC has admitted that a university halls of residence may be one of the most difficult types of premises to define in terms of eligibility for capital allowances because there are so many variations in student properties. 

Previously, student digs were classed as “non-dwelling” houses for capital allowance purposes. Under the new amendments, some will be defined as “dwelling” accommodation making them ineligible for the tax break. 

But some will still qualify for the allowance and, in terms of different types of accommodation, the sheer diversity of student properties means it will not be easy for landlords and advisers to work out whether they are still eligible or not. 

Despite this possibility, HMRC is still withdrawing the allowance, aligning university accommodation with the rules governing the flats and houses shared by young professionals or key workers. 

“The fact that [the flat or house] may be occupied by students is, in a sense, incidental,” HMRC has stated.

A good indication of the level of complexity facing landlords and advisers is the fact that properties where, say, the “kitchen and dining facilities are physically separate from the study-bedrooms and may not always be accessible to the students”, the capital allowance is still available, HMRC says. 

One potential snag lies in the fact that some student blocks contain a mix of flats. These may or may not have communal areas and also gives students the option to have meals provided in halls.

Combinations like this will cause a significant grey area for landlords and a headache for advisers because they may have to undertake onerous investigations to work out where there clients stand. 

The legislation has also been pushed through despite tax advisers expressing reservations about the amendments when they were proposed in Dec­ember 2008.

The bad news for landlords is that any claims for capital allowance on expenditure incurred after the proposals were rolled out will come under the amended guidance.

Claims for any capital expenditure forked out before December 2008 made in returns for open years (any tax years where a return hasn’t been submitted) will still have to work out if they are caught by the changes, so landlords, their advisers and students are set for more misery.

HMRC said it was simply updating the guidance in the Capital Allowances Manual on the meaning of “dwelling house”.

The update trumps an earlier one “which erroneously suggested
that communal areas in houses of multiple occupation should not be regarded as part of the “dwelling house”, the taxman said.

However, this view was only put out for consultation and was never, in fact, incorporated in formal guidance,” HMRC added.

“Nevertheless, HMRC will accept returns for open years relying on this erroneous view, if filed before the date of the recent brief, 22 October 2010.”




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