Private Use Assets and Capital Allowances

Private use assets are business assets that are used for both business and personal purposes. When claiming capital allowances on these assets, businesses must adjust their claims to reflect the portion used for business activities. Understanding how private use affects capital allowances ensures compliance with tax regulations and helps businesses optimize their tax relief.

1. What Are Private Use Assets?

Private use assets are assets that are partially used for non-business purposes by business owners or employees. These assets are subject to special tax treatment when claiming capital allowances.

A. Key Features of Private Use Assets

  • Used for both business and personal purposes.
  • Capital allowances are restricted to the business-use portion.
  • Common in sole traders and partnerships (less common for companies).
  • May require balancing adjustments upon disposal.

B. Examples of Private Use Assets

  • Company cars used by owners for personal travel.
  • Machinery or equipment used for personal projects.
  • Office computers used for personal browsing or entertainment.
  • Business premises partially used as a private residence.

2. How Capital Allowances Work for Private Use Assets

When an asset is used privately, only the business-use portion qualifies for capital allowances.

A. Business-Use Percentage

  • Capital allowances must be adjusted based on business-use proportion.
  • Calculated as: (Business Use % × Capital Allowance)

B. Example Calculation

A sole trader purchases a vehicle for $30,000 and uses it 70% for business and 30% for private purposes. The capital allowance treatment is as follows:

  • Annual Investment Allowance (AIA): $30,000 × 70% = $21,000 claimable.
  • Writing Down Allowance (WDA): If AIA is not used, WDA at 18% is applied:
    • Year 1: ($30,000 × 18%) × 70% = $3,780 deduction.
    • Year 2: (Remaining balance × 18%) × 70%.

3. Capital Allowance Treatment Based on Business Structure

Private use adjustments depend on whether the asset is owned by a sole trader, partnership, or company.

A. Sole Traders and Partnerships

  • Private use adjustments must be made when claiming capital allowances.
  • Each partner’s private use portion is deducted individually.

B. Limited Companies

  • Private use by employees (including directors) is treated as a benefit-in-kind.
  • Capital allowances are claimed in full by the company.
  • Employees may need to pay tax on personal use benefits.

4. Disposing of Private Use Assets

When a private use asset is sold, balancing charges and allowances are adjusted based on the business-use portion.

A. Balancing Adjustments

  • If the asset is sold for more than its tax-written-down value, a balancing charge applies (business-use portion only).
  • If the asset is sold for less, a balancing allowance may be claimed.

B. Example Disposal Calculation

  • Original cost: $20,000.
  • Tax-written-down value: $8,000.
  • Sale price: $10,000.
  • Business use: 60%.
  • Balancing Charge: ($10,000 – $8,000) × 60% = $1,200 added to taxable income.

5. How to Minimize Tax Liabilities on Private Use Assets

Businesses can use various strategies to optimize tax relief while complying with private use asset rules.

A. Maximize Business Use

  • Ensure that assets are primarily used for business to increase the allowable deduction.
  • Document business use to justify claims.

B. Consider Leasing Instead of Buying

  • Leasing assets instead of purchasing may offer better tax treatment.
  • Lease payments may be deductible as business expenses.

C. Maintain Accurate Records

  • Keep logs of business and private use, especially for vehicles.
  • Retain receipts and records to support capital allowance claims.

6. Ensuring Compliance in Private Use Asset Claims

Businesses must follow proper tax reporting procedures to ensure compliance with private use asset rules.

A. Maintain Clear Documentation

  • Record usage percentages and adjustments made.
  • Keep invoices and asset ownership records.

B. Seek Professional Tax Advice

  • Consult an accountant to determine the correct business-use proportion.
  • Stay updated on tax law changes affecting private use assets.

7. Optimizing Capital Allowances for Private Use Assets

Businesses using assets for both personal and business purposes must carefully adjust their capital allowance claims. By accurately recording business use, maximizing deductions, and staying compliant with tax rules, businesses can optimize tax savings while ensuring proper reporting of private use assets.