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The New Capital Allowances Rules for Property Transactions

Tue 01 Jul 2014

Introduction

The biggest changes to the capital allowances (CA) rules since July 1996 have been introduced for buyers and sellers of commercial property. This article takes a look at the new rules and how they affect those involved in commercial property transactions.

What are capital allowances?

CA are a form of tax depreciation that provide tax relief for property owners, occupiers and investors.

Since 2011, when industrial buildings allowances were abolished, there has been no tax relief available for expenditure incurred on the raw building or structural components of a building, such as the floor, roof, walls and so on.

Instead, CA are available (by reference to set percentages) for expenditure incurred on different types of asset classes and, in terms of commercial properties, this includes expenditure incurred on items such as:

  • plant and machinery;
  • integral features;
  • short-life asstes;
  • long-life assets; and
  • energy-efficient and water-saving assets.

So what’s changed?

Broadly, under the new rules, a second hand / subsequent purchaser will only be able to obtain CA going forward if the vendor has “pooled” their relevant expenditure in an accounting period during the vendor’s period of ownership.

“Pooling” in this context means that the vendor has added the qualifying expenditure to their CA pool.

This means that purchasers (and their professional advisers) will need to ensure that appropriate records (or at least confirmations by way of sufficient warranties and/or indemnities from the seller) are included in the sale and purchase documentation. Otherwise, purchasers (and all subsequent purchasers) will not be able to obtain CA if the qualifying expenditure has not been properly accounted for at the time the property is sold. This will clearly have a negative impact on the property’s value.     

Why has the law changed?

HM Revenue and Customs believe that too many erroneous claims for CA have been made.

The new rules aim to ensure that the issue is addressed at the point of sale, supported by the relevant documentation and, therefore, is aimed at safeguarding against inflated and unsupported CA claims. 

When do the changes take effect?

These changes are now in force. They took effect from 1st April 2014 for corporate taxpayers and from 6th April 2014 for income taxpayers.

What if you are buying from a property developer / non-taxpayer?

Some entities, such as property developers holding their commercial property as trading stock or pension funds and charities, are not entitled to claim CA. Therefore, such entities would have not have pooled any expenditure that would have otherwise qualified had they been holding the property on their balance sheet or had they been a taxable entity.

If a purchaser is buying commercial property from this type of entity, the purchaser will not be able to claim CA unless the most recent owner (after March 2014) who was entitled to claim CA (before the disqualified entity) pooled their CA expenditure. This means that it is important for property developers and non-taxpayers to obtain the necessary information about CA even though they cannot claim relief themselves. If they fail to do so, no subsequent purchaser will be able to benefit from CA and this is likely to negatively impact upon the property’s value.

What about the fixed value or election requirements?

A fixed value or election requirement has applied to property acquisitions since April 2012. These will still need to be satisfied, in addition to the new pooling requirement, before a purchaser can claim CA.

Under an election requirement, where a seller has claimed CA, the seller and the purchaser must make an election (under section 198 or 199 of the Capital Allowances Act 2001 (as appropriate)) setting out the value of the fixtures within two years of the date of completion. This requires the seller to bring the value into account as a disposal value in its CA computation. The purchaser should then be free to claim CA on this amount.

In some limited circumstances, the seller can provide a written statement of the amount of the disposal value of the fixtures.

Property developers and non-taxpayers can still make an election when buying property. However, if they fail to do so, the fixed value requirement can still be satisfied by obtaining written statements from:

  • the property developer or non-taxpayer claiming that an election was not made at the time of acquisition and can no longer be made; or
  • the party that sold the property to the property developer or non-taxpayer, containing the disposal value that it brought into its CA computation.

However, obtaining the co-operation of the person who sold the property to the developer or non-taxpayer is likely to be difficult in practice, particularly if some period of time has already elapsed.

So what should you think about in practice?

CA can be an extremely valuable form of tax relief and their availability can often be overlooked by parties to commercial property transactions and, in some cases, their professional advisers.

Accordingly, it is important to raise the issue of CA early on in the process (regardless of whether you are selling or buying) as this can enhance or reduce the value of the commercial property being transacted. Ideally, CA should be addressed in the Heads of Terms.

You also want to check that your professional advisers have the necessary experience and are fully up to speed on the various CA changes to ensure that no opportunities are missed.   

Ultimately, CA can make a significant difference to the economics of a commercial property transaction and the parties (and their professional advisers) should always try to ensure that the ultimate amount is made available and can be claimed.

Next Steps

Winckworth Sherwood’s tax team has significant capital allowances expertise and they would be delighted to help you maximise the tax benefits of buying or selling commercial property.

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