A Capital Allowance is a payment received by the UK taxpayer for making his property available for use. The allowance is calculated by subtracting the market value of the property from the current fair market value. If the capital is overpaid, it can be deducted at the next year’s end. This applies to property in the United Kingdom. Capital allowances are paid for businesses as well as individuals.
There are two types of allowances: one is based on purchase and the other is based on sale. Wherever a property is purchased, capital is allowed to be used. For example, when a property is purchased in the United Kingdom and used within a year, then it can be taxed as if it were purchased within that year alone. The same applies to the second type of allowance, which is based on sale. Where a property is sold and the proceeds thereof are more than the capital amount (as determined in the previous year), then the amount can be taxed as ordinary income.
Depending on the tax relief available at the time of sale, there are different rates of capital allowances that can be paid. The price of the property may not be greater than the exemption rate for that year. If the price of the property is less than the exemption rate for that year, then the capital will not be taxed. Any capital that was received during the year and used is fully taxable, as per the rates at the time of sale. Any capital that was not used is fully taxable and the capital must be included in the income of the year that it was received.
Businesses in the United Kingdom have different options on how to save capital. In certain cases, such as for those who are self-employed or owners of small businesses, there are special savings options that can be made. These options are detailed in a company return and must be submitted to the UK tax authorities.
One of the most common ways to save capital is through borrowing. By borrowing against the capital allowances allowed by the UK tax law, an individual or a company can increase their savings. Borrowing is done in two different ways, by taking out a loan and paying interest or by saving the amount of capital over a fixed period of time. Most UK taxpayers choose to take out a loan, as this is the best method for capital appreciation.
A business that earns a profit must pay capital gains tax. However, they do not need to pay it if the profit they make is higher than the tax-free allowance that applies to them. This tax saving is also allowed to companies, partnerships and individuals, on their personal income and assets. Any amount that exceeds the allowance is exempt from UK tax.