HMRC guidance on Capital Allowances for Real Estate Investment Trusts (REITs)

HMRC’s Investment Funds Manual provides guidance on Capital Allowances for Real Estate Investment Trusts (REITs). 

The guidance confirms that a claim for first year allowances (FYA) in respect of capital expenditure (e.g. full expensing) and the annual investment allowance (AIA) is permissible but not mandatory. This is different to the position for writing down allowances (WDA), which must be claimed in full where available. 

How do Capital Allowances impact REIT distribution requirements? 

The amount of Capital Allowances claimed influences the level of Property Income Distribution that must be paid by the REIT in order to satisfy the 90 percent distribution requirement. 

Capital Allowances are taken into account in the calculation of the profits of the property rental business, which will have the effect of reducing profits and the property income distribution to, and the tax liability of, the shareholders. 

A Capital Allowances ‘shadow’ regime operates within the property rental business, although the obligation to consider the maximum Capital Allowances does not extend to first year allowances or the annual investment allowance, where there is flexibility about the amounts taken into account. 

In practice, a REIT is therefore obliged to identify the amount of qualifying expenditure it has incurred in each accounting period and include the maximum Capital Allowances available (after any claims for FYA or the AIA it may choose to make are taken into account) in the calculation of tax-exempt profits.

How Leyton can help

The choice over claiming the first year allowance and annual investment allowance is an important strategic decision for any REIT.

Our specialist team of Capital Allowances experts can provide advice and support to ensure you are making the most of the tax relief available, while meeting HMRC’s requirements with confidence.  

Get in touch today to find out how they can help.

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