Capital allowances can be a hidden treasure for HMO (House in Multiple Occupation) landlords in the UK. While often overlooked, claiming capital allowances can unlock significant tax relief on qualifying expenditure within your HMO property. These allowances are often misunderstood or dismissed as only being applicable to commercial premises, but the communal nature of HMOs opens the door for landlords to benefit in a very similar way.
In this in-depth guide, we explain exactly what capital allowances are, how they apply to HMOs, who can claim them, and how to maximise your benefit. Whether you’re acquiring your first HMO or already have a portfolio under management, understanding how capital allowances can reduce your tax liability is an essential part of maximising return on investment.
What Are Capital Allowances?
Capital allowances are a form of tax relief that allow property owners to deduct the cost of qualifying items used in the business from their taxable profits. Instead of claiming the full cost of a property improvement or fixture as an expense in one year, capital allowances let you spread the tax benefit over time.
This can significantly improve a landlord’s after-tax cash flow, particularly for those operating within limited company structures. In essence, capital allowances enable you to treat certain parts of the building—not the land or bricks, but the ‘machinery’ that makes the building function—as business assets for tax purposes.
Over time, this tax benefit can add up to tens of thousands of pounds. The key is in identifying which parts of the property qualify, which depends heavily on how the property is used and configured. HMOs are particularly suitable for claims because of their shared-use features that resemble commercial environments.
How Do Capital Allowances Apply to HMOs?
HMOs are unique because they fall between residential and commercial classifications. While traditional buy-to-let properties are generally excluded from capital allowances (as they are considered dwellings), HMOs are different because they contain shared facilities that may qualify as business-use areas.
This means that communal spaces used by multiple tenants can be treated as eligible for capital allowances. These include communal kitchens, hallways, utility spaces, and shared bathrooms. In the eyes of HMRC, areas that are not part of a single household’s private use can be treated as assets used for business purposes.
This distinction makes HMOs far more valuable from a tax-relief perspective than many landlords realise. In fact, a professional capital allowances surveyor may be able to identify claimable items that standard accountants would miss. These include fixed systems, integral features, and even large items like water heating systems or specialist ventilation.
Depending on the property and how it’s structured, you could claim 10% to 35% of the property’s value as qualifying capital expenditure. This can translate into a meaningful reduction in corporation tax over multiple years, improving the long-term profitability of your investment.
Who Can Claim Capital Allowances?
To benefit from capital allowances on HMOs, you must:
- Be a UK taxpayer;
- Be using the property for a qualifying business activity (typically through a limited company or LLP);
- Own the property (freehold or long leasehold);
- Operate a property with qualifying communal/shared facilities.
For landlords operating through a limited company, the process of claiming is generally straightforward. However, even individual landlords may be able to claim allowances in some scenarios, particularly if their properties are furnished and meet certain communal-use conditions. It’s essential to check whether your business setup meets HMRC’s criteria and whether your tax return type allows such claims.
In recent years, more investors have chosen to operate their HMOs through corporate structures. This makes capital allowance claims more common—and more powerful—since company profits can be more strategically offset using these allowances.
When Can You Claim Capital Allowances?
Timing can play an important role in the size and efficiency of your claim. The most common time to make a claim is upon purchasing an HMO, but you can also claim capital allowances retrospectively—often going back years if previous owners did not make a claim.
Capital allowances can also be applied to refurbishment work. For instance, if you’ve invested significantly in upgrading communal areas, installing fire alarms, rewiring, or replacing heating systems, these improvements may qualify.
An HMO purchased in prior years can still be reviewed today, and a retrospective claim may unlock substantial savings. As long as the property has not already had a capital allowances claim made by a previous owner and you still own it, you may be eligible.
How to Make a Claim
To make a successful claim, most landlords rely on a specialist capital allowances surveyor or firm. These professionals understand how to break down the cost of a property into its qualifying components. Their survey involves identifying every item that qualifies as plant and machinery and producing a detailed report justifying each element.
Once this report is completed, it is passed on to your accountant, who will include the claim in your tax return. The numbers are entered in a specific section of your Corporation Tax return or Self Assessment, depending on your business structure.
The value here is not just in identifying obvious items like boilers or fire alarms, but in the methodical categorisation of hundreds of elements—from extractors to wiring routes—that collectively contribute to the claim. Without a specialist, most landlords significantly underclaim or miss the opportunity entirely.
Example: HMO Purchase Capital Allowance Claim
Imagine purchasing an HMO for £400,000. After instructing a capital allowances surveyor, they identify qualifying plant and machinery valued at £80,000—20% of the purchase price. As a company operating at the standard corporation tax rate of 20%, this results in a £16,000 reduction in tax liability.
Rather than applying this all in one year, the allowance is spread across several years as part of your company’s annual capital allowance pool. The practical benefit is that it reduces your taxable profit year after year, making your investment more efficient and freeing up cash flow to reinvest elsewhere.
Some landlords choose to reinvest that tax saving directly into the property, perhaps upgrading further or increasing the property’s rental appeal. Others use it to fund future acquisitions. Either way, capital allowances become a strategic tool—not just a reactive accounting exercise.
Capital Allowances on Refurbishments
If you’ve undertaken significant work to an HMO—such as converting a family home into a compliant multi-let property—you may be entitled to capital allowances on the parts of that refurbishment that relate to qualifying assets.
This includes items like new boilers, lighting systems, and upgraded communal kitchens. It does not apply to decorative finishes, painting, or structural work unless it involves embedded systems that qualify. This makes it essential to keep your invoices and records segmented by type of expenditure. Without a clear distinction, HMRC may disallow parts of your claim.
The best time to think about capital allowances on refurbishment projects is before the work begins. This gives you time to prepare your documentation accordingly and make sure the work is specified in a way that supports a future claim.
Risks, Misconceptions, and Compliance
The biggest risk for landlords is assuming their HMO doesn’t qualify. Many accountants, particularly those unfamiliar with capital allowances in a property context, may overlook valuable claims. Others may dismiss eligibility based on the residential nature of the property, not realising the importance of communal areas in HMO structures.
It’s also critical to ensure full compliance. If your claim is challenged by HMRC, you’ll need to show clear documentation, justification for the valuations, and proper treatment in your tax filings. This is another reason why engaging a specialist provider is worthwhile. They understand the language HMRC expects and the level of detail needed.
Another important point is the effect on future sales. If you claim allowances now and then sell the property later, a balancing charge could apply—meaning you pay some of the tax savings back. This isn’t always a bad thing, but it should be part of your long-term planning.
Conclusion
HMO capital allowances represent one of the most underutilised tax benefits available to landlords in the UK. By understanding how these allowances work and seeking expert advice, landlords can save thousands—sometimes tens of thousands—of pounds in tax over the life of their investment.
Rather than viewing capital allowances as a niche or obscure tax concept, savvy landlords are using them as a strategic lever to enhance profitability, improve cash flow, and reinvest into their portfolios. As the HMO market grows and regulation tightens, every opportunity to strengthen your bottom line becomes more valuable.
If you own, are buying, or have recently refurbished an HMO, it may be time to revisit your tax strategy. The capital locked inside your building could be working harder for you—if you know where to look.