Tax deduction for a gifted asset?

A gift with extra benefit

It’s nice to receive gifts at Christmas. Usually, apart from thanking the person who gave it, you don’t give it a great deal more thought, but maybe 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 etc., 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’re 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. Nick’s wife Sally gave him a new high-end camera for Christmas 2023. It cost her £3,900. Nick already uses a camera in his business but it’s getting towards the end of its life. While he’s getting used to the new camera Nick continues to use the old one for work. In May 2024 he retires his old camera and switches to the new one. Nick 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 CAs rules 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, these days a computer is a necessity for most jobs involving admin.

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’s 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 (MV) at the time it first qualifies for CAs. The MV is the amount you could expect to get if you sold the equipment to someone with whom you have no connection. In our example, the amount Nick can claim is equal to the MV 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.