There are very few tax breaks available for owners of or investors in UK commercial property. Therefore, it comes as a surprise that capital allowances, a valuable form of tax relief, are either under-claimed or not claimed at all due to a lack of understanding or application of the legislation and case law governing the availability of the relief.
Capital allowances are available for qualifying capital expenditure incurred on certain buildings, fixtures and chattels and attract specific rates or amounts of tax relief, which can then be offset against taxable profits reducing your tax bill!
There are certain hurdles that must be cleared before capital allowances can be claimed. However, once these conditions are satisfied, then large percentages of the cost of a construction/refurbishment/fit-out project, or the acquisition cost of a property, could attract the tax relief.
What capital allowances may be available?
Since 2011 it is no longer possible to claim capital allowances on the actual building or structural aspects of the property, e.g. floors, roof, walls. However capital allowances on commercial properties are still available in a number of forms including:
– Plant and machinery (currently available at a rate of 18% pa)
– Integral features – such as electrical and cold water systems, lifts, air conditioning and many other items commonly found in commercial buildings (since April 2008 – currently available at a rate of 8% pa).
Purchasing a commercial property
If you are considering purchasing a commercial property, or own a property purchased in the past, then capital allowances may be available to you. The quantum of the tax relief available is dependent on the historic ownership of the property and not necessarily the age of the building. The tax relief is very generous with up to 50% of the purchase price potentially qualifying for it. (see general rule of thumb % below).
In the last 10 years, there have been several changes to the legislation governing capital allowances on property transactions and misunderstandings, or commercial pressures to get the deal done, can lead to missed relief.
The answers provided to the normal Commercial Property Standard Enquiries (CPSEs) are often insufficient to determine the potential capital allowances available to a purchaser. The lawyers dealing with the purchase may not to be in a position to review the responses from a capital allowances perspective as this is a specialist technical area.
This together with the commercial pressures ‘just to get the deal done’ and a lack of understanding as to the potential value to the purchase of getting this right, can often result in capital allowances being overlooked.
What are the rules?
Changes to the capital allowances rules on second hand property were introduced from April 2012 and came into full effect from April 2014.
The rules can be quite complex but in general terms to be able to claim capital allowances under these rules the following must be met:
The seller and purchase must agree the part of the purchase price that is apportioned to fixtures in the building. This can be done either by entering into a joint election (a s198 CAA 2001 election) OR, by applying to the First-tier tribunal to fix the value. Either way this must be done within two years of the purchase.
This rule applies since April 2014. It requires the seller to stipulate that they have ‘pooled’ the expenditure on fixtures before the property is sold, i.e. they must have included the assets in their capital allowances calculations where they qualified.
If these are not met then HMRC will deem the value of any fixtures acquired to be nil so NO capital allowances can be claimed by the purchaser.
Words of warning
Normally, a purchaser will wish this value to be higher and the seller to be lower therefore it is strongly advisable to meet this requirement as part of the sale negotiations and by way of a S198 election at the time of sale/purchase. This provides certainty and is more cost and time efficient. It is very difficult to agree this after the fact.
Furthermore, if the above are not met then not only with the current purchase not be able to claim capital allowances on assets that exist at the time of purchase, no future purchaser will either. In some cases this could impact the future sale price.
Selling a commercial property
If you are the seller rather than the purchaser then you should also ensure that the above requirements are met. If you do not fix the price then HMRC could seek to argue that balancing charges arise on the sale.
Ensuring that you have detailed supporting information for assets that you have pooled and claimed capital allowances on can assist with a future sale as it will make it smoother and potentially more valuable for a purchaser.
Construction, refurbishment and fit-out projects
For these types of project, if advice is taken early enough in the development cycle, it is possible to “design in” capital allowances tax relief, through the careful selection of construction components and wording of contract clauses.
Getting advice early can greatly improve the quantum of capital allowances due and also ensure that the appropriate documentation is available to support the claim for the tax relief. Depending on the type of project, between 30% and 90% of the expenditure incurred could qualify for the tax relief (see general rule of thumb below).
Capital allowances rules of thumb
The potential capital allowances available will depend on the facts in each case. However as a general rule of thumb and to provide a guide to the potential value in capital allowances to show why specialist advice should be sort please see the table below:
Acquisitions, disposals and construction projects*
|Property Type||Acquisition / Disposal Qualifying %||New Build / Refurb / Fit-Out Qualifying %|
|Furnished Holiday Let||15%-25%||15%-30%|
*Figures provided by Chris Doyle of Yewell Consulting LLP. The exact percentage that would qualify will depend on the facts in each case the above is just a general rule of thumb as a guide.
Seek early advice
Capital allowances are an extremely valuable relief and can reduce your tax liabilities substantially yet are often missed. Early and specialist advice is key and the cost of obtaining this advice is normally greatly outweighed by the potential tax savings. Miss these at your peril!