One year on from changes in the rules for the claiming of Capital Allowances for commercial property buyers, buyers are still not maximising the potential from their purchase.
When a commercial property is purchased, a buyer acquires not only the land and buildings, but also the fixtures attached to those buildings. Usually expenditure on a property purchase will be a capital expenditure and taxpayers are entitled to claim capital allowances in respect of some, but not all, capital expenditure.
However, many commercial property buyers are unaware of this so we’re making it our aim in this blog post to make them aware of their legal entitlements.
Capital Allowances – Form Of Tax Relief
Capital allowances are a form of tax relief for property owners occupier and investors. They are available for expenditure on certain plant and machinery, including energy and water saving technology. These items can quite often represent a significant proportion of the purchase costs of a property. There are detailed rules regarding the timing of the relief, but generally speaking expenditure of usually put into a “pool” that is written off at an annual rate. There are occasions where some of the expenditure can be relieved up front.
Capital allowances are available when carrying out a taxable activity like a trade, or letting out property. They key is that they are not given automatically, they must be claimed. If they are claimed, Capital Allowances provide the claimant with an annual tax deduction that reduces the claimants taxable profits and the tax that the claiming pays.
There are different types of Capital allowances and there are special rules to calculate how much, if any, relief you can claim. The HMRC rules must be followed, rather than your usual practice for calculating depreciation. In summary:
A Claim Can Be Made Through A Company’s Annual Investment Allowance On Most Plan And Machinery
Expenditure on all items of plant and machinery are pooled rather than each item being deal with separately with most items allowance to a general pool
Certain expenditure on some fixates, known as Integral Features, have lower eligibility so are allocated to a separate pool.
Enhanced Capital Allowances
There are Enhanced Capital Allowances available for specific plant and machinery that are included on the Energy Technology List
The opportunity is not one to be ignored, but since April 2014, new rules mean that a buyer of commercial property needs to be aware of the potential tax allowances before the purchase is completed. The new rules apply to the acquisition of a second hand commercial property on or after 1 or 6 April 2014 (depending on whether the buyer would pay Corporation or Income Tax).
Tax paying vendors of commercial property need to be aware that if they decide not to make a claim for plan and machinery allowances on fixtures and subsequently sell the property after April 2014, a tax paying purchaser will lose out and will not be eligible to claim any allowances for expenditure where the vendor was entitled.
So What Does This Mean For Buyers And Sellers?
Under the new rules the sale of a commercial property must come with an election notice of the value of all pooled, qualifying expenditure since 23 July 1996, and be lodged within two years of the disposal. This means that any qualifying expenditure must be evidenced and recorded and an election made.
As part of the sales process, the buyer and seller must agree what, if any, claimable sum is to be passed onto the buyer for their benefit. The seller isn’t actually obliged to pass on any of the allowances – so buyers must beware. It’s not uncommon for corporate sellers to allocate a nominal sum to the buyer in the contract (even as low as £1.00) and effectively keep all of the allowances.
What is critically important is that Capital Allowances can’t be claimed twice. If the seller has utilised the allowances, the buyer can’t claim. Worse still, the seller could even be claiming allowances well after they have sold the property.
Final Words For Commercial Property Buyers: Get Clarity Before Completion
John Cook, Butterworths
The simple golden rule is to achieve clarity before completion. Find out what the seller has claimed and make sure that you have a right to claim following completion. If you have already purchased property, it may not be too late. Your lawyer or accountant should be able to help you.