What Is Their Value To You?

Take an air-conditioned office building purchased for £10 million. The plant and machinery might have an apportioned cost of say £2.4 million. This may be written down against tax by £600,000 in the first year (25% of £2.4 million), a further £450,000 (25% on the reduced balance of £1.8 million) in the second year, £337,500 in the third year (25% of the reduced balance of £1.35 million), and so on, for as long as the property remains in the investor's ownership.

With a corporate tax rate of 30%, the saving to the investor's tax bill in this example will be £180,000 (30% of £600,000) in the first year alone, with a saving of £416,250 over the first three year period.

	Balance of Capital Allowances £	Annual Write-Down at 25% £	Tax Relief to a 30% Taxpayer £
Year 1	2,400,000	600,000	180,000
Year 2	1,800,000	450,000	135,000
Year 3	1,350,000	337,500	101,250

If the property had already been in the investor's ownership for some considerable time and no claims made, capital allowances will not have been lost, providing the property is still in their ownership. It may be possible to roll forward a maximum of the two previous tax years capital allowances into the current year, thereby allowing the investor to benefit from three years worth of tax saving straight away.

If this property has a 7% yield, it will be equivalent to only 4.9% after 30% tax. Capital allowances relief of £180,000 in the first year has the effect of increasing the net yield to 6.7%.

An overseas investor will pay tax at 22% on the income received, equivalent to £154,000 on the £700,000 rent. The first year's capital allowances will therefore eradicate all but £22,000 of that liability!