Capital Allowances
What are capital allowances?
Capital allowances is a form of tax relief which can provide a valuable tax saving if claimed on certain property expenditure, such as plant and machinery. Capital allowances can be a valuable and often overlooked issue on the sale of a commercial property.
Who is eligible for capital allowances?
Capital allowances are available to owner occupiers, companies, small enterprises, partnerships, individuals and overseas investors (subject to UK tax). If you have allocated capital funds towards the purchase, building or improvement of commercial properties and you are an income or corporate taxpaying entity, there is a high likelihood that you can leverage capital allowance benefits.
Anyone who owns an interest in a property, whether it be a freehold, leasehold or as a tenant and incurs capital expenditure either by acquiring that property, developing a property, refurbishment or fitting out. These will all give rise to an opportunity to claim Capital Allowances. Property such as offices, industrial units, retail, leisure can claim capital allowances, the only specific exclusion is a dwelling such as a house or flat, however, the common areas of a block of flats including plant rooms can be claimed on, as can residential care homes, and serviced accommodation.
What can you claim on?
You can claim on items that you keep in your business known as “plant and machinery”, some of the most common of which are:-
- Lifts;
- Air conditioning and air cooling systems;
- Electrical systems, including lighting systems, telephone and computer systems;
- Fitted kitchens;
- Sanitary fittings;
- Fire alarm and CCTV systems.
When purchasing a building, capital allowances must be identified and recorded at the point of purchase and sale of the property. If this is not done the opportunity to claim for these items may be lost. Purchasers may only claim for integral features and fixtures for which the previous owner did not make a claim. Further claims can be made where the building is extended or new elements are introduced to the building, but not in respect of pre-existing machinery for which the seller has already made a claim.
When are capital allowances available?
Capital allowances are not granted automatically, they must be claimed within your tax return. There is no time limit when claiming capital allowances, as long as the asset you are claiming for is still owned and used by the business.
To benefit from making a claim for capital allowances, the property must be held as your business premises or an investment property from which you receive an income from. Property that is developed by a developer and held as trading stock, does not qualify. As capital allowances is a form of “tax relief” you must be a taxpayer, so non-tax payers such as pension funds or charities, cannot claim.
Key issues to bear in mind?
When a property is sold, if the seller has been claiming capital allowances in respect of the plant and machinery within a building, it will need to work out what part of the sale proceeds are attributable to the assets which qualified for allowances. This figure will then be used by the seller in their capital allowance calculations.
As part of the purchase and sale negotiations, the parties will be required to enter into a Section 198 election under the Capital Allowances Act 2001 which fixes the value of the fixed assets at that point of sale and will enable the purchaser to get the benefit of any unclaimed allowances. The general position for working out the amount of sale proceeds of a building which relates to assets qualifying for allowance is to carry out a just and reasonable apportionment.
The parties will generally make the election for each pool of assets ether at £1 or at a tax written down value which is the balance of expenditure in respect of which capital allowances have not yet been claimed.
The sooner the capital allowances position is clarified during the sale process the better.
There are two options when selling a property;
1 the seller can retain the benefit of the capital allowances when the property is sold. This is done by a Section 198 election with a value of £1. The effect of this will be to restrict any capital allowances claim the purchaser can make to £1 and allows the former owner to continue to claim the capital allowances which have been identified whilst he owned the property, after the sale has completed.
2 the seller can pass any unclaimed capital allowances to the purchaser. This is done by completing a Section 198 election with the tax written down value of the capital allowances at the point of sale. This would be a point of negotiation and will mark a property as a more desirable to potential property investors.
If the parties make the election at £1 the seller will continue to benefit from any allowances which have not been claimed at the point of sale but the purchaser will be unable to make any claims for allowances in relation to the purchase of the property.
It is always important to ensure that proper and full due diligence enquiries are undertaken and fully reviewed when entering into a property transaction. We advise vendors and purchasers to always take specialist tax advice in relation to capital allowance.
Jade Bishop is a paralegal at Keelys LLP