The gift of capital allowances

You received a new laptop for Christmas which you will use for work. Even though it cost you nothing, can you claim a tax deduction in respect of the business use?  Kenny Logan from our Edinburgh office provides the answer below.

A gift with extra benefit
It’s nice to receive gifts and apart from thanking the person who gave it to you, you don’t give it a great deal more thought, but perhaps you should. If you use something you’ve been given in your job or business, you might be entitled to an extra tax deduction. Of course, this tax break doesn’t just apply to Christmas presents. Whatever the occasion the tax break applies.

You can claim a capital allowances (CAs) tax deduction for equipment, e.g. a computer or briefcase and so on that you receive as a gift if you’re a self-employed employee or director and use it for work. Of course, there are conditions.

Self-employed
If you are self-employed (a sole trader or partner in a business), CAs can be claimed for equipment starting in the accounting period you first use it for your work.

EXAMPLE
David’s wife gave him a new high-end camera for Christmas 2023. It cost her £3,900. David already uses a camera in his business but it’s getting towards the end of its life. While he’s getting use to the new camera, David continues to use the old one for work. In May 2024 he retires his old camera and switches to the new one. David can claim capital allowances for the tax year 2024/25, not the year in which he received the gift, i.e. 2023/24.

Employees and directors
As an employee or director, the rules for capital allowances are broadly the same as those for someone who’s self-employed, but there are some limitations on what CAs can be claimed for and the timing of the deductions. To qualify, equipment must be required for the job. In other words, an employee or director can’t reasonably do their job without it. For example, a laptop computer.

For directors and employees some types of equipment don’t qualify for CAs, essentially, cars and vans. A mileage rate deduction for business journeys is allowed instead.

Where the equipment is used for a job which commenced part way through a tax year, the CAs deduction is reduced for that year.

How much tax relief?
Normally, the annual investment allowance (AIA) means that CAs for the full cost of the equipment (up to £1 million) can be claimed as a tax deduction for the tax year it is acquired. However, a special rule blocks the AIA for items received as gifts. Instead, the amount on which CAs can be claimed is limited to the market value at the time it first qualifies for CAs. The market value is the amount you could expect to get if you sold the equipment to someone with whom you have no connection. In the example above, the amount David can claim is equal to the market value of the camera in May 2024. Where the AIA doesn’t apply, you can claim a percentage of the value each tax year reduced proportionately to account for any non-business use.

IN SUMMARY
You are entitled to claim a capital allowances tax deduction (CA’s) for equipment you receive as a gift and use in your business. The amount qualifying for CAs is based on the value of the equipment when you first use it for work. The CAs are equal to a percentage of the qualifying value each year.

For more detail and questions relating the tax breaks, tax deductions, capital allowances and annual investment allowances, please do contact our tax department.