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New capital allowances for buildings and structures

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Return of Industrial buildings allowance? Not quite!

Lucy Mangan - Menzies Accountant

Lucy Mangan – Partner

In the 2018 Budget, the chancellor announced a new Structures and Buildings Allowance (SBA) which will apply to construction costs incurred on qualifying structures and buildings where the costs do not currently qualify for capital allowances.

The stated purpose being to address a gap in the capital allowances rules since the industrial buildings allowance was abolished in 2008 to give the UK even more of a competitive advantage and encourage investment.

Draft legislation has been published but we await the final rules. As always there will be many details within these rules but in essence tax relief will be available where:

  • qualifying costs are incurred on contracts entered into from 29 October 2018, 
  • on a qualifying non-residential structure or building,
  • used for a qualifying activity

This is generally welcome news as this allowance will result in up-front tax relief, and therefore a cash flow advantage but there will be some administrative costs to ensure the relief is maximised.


Key points to consider

Qualifying costs?

The costs must be incurred under contracts entered into from 29 October 2018 and below shows how certain costs are expected to be treated:

Qualifying costs Non qualifying costs
The cost of constructing a new structure/building or improving The cost of land or rights over land
Renovating or converting existing structures Stamp duty land tax
Costs of demolition The costs of planning permission
Land alterations necessary for construction
Any direct costs required to bring the asset into existence

If the building/structure is acquired from a developer then an apportionment of the cost between the land and building is required. Relief only available on the element attributable to the building.


Qualifying properties?

Non-residential structures and buildings include: offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses, hotels and care homes.

It does not include university, school or military accommodation or prisons.

The relief is available for UK and overseas structures/buildings as long as the business is subject to UK tax.

If the building is a mix of commercial and residential relief will be apportioned.

Who can claim?

The relief is available to both businesses that are chargeable to income tax and corporation tax that have a right over the land on which the structure or building is constructed. There will be specific rules regarding lessees which are not covered here.

Importantly any unused relief stays with the property and is subject to certain conditions available to future owners.

How does the relief work?

Relief is given by way of a 2% writing down allowance. This is a flat rate allowance calculated on the amount of the original expenditure for 50 years and is available from the date the structure/building is brought into use.

NOTE – IF NOT CLAIMED IT IS LOST AND CANNOT BE CARRIED FORWARD AND CLAIMED IN A LATER PERIOD.

There will be specific rules regarding disuse and change of use or demolition of the building/structure.


What happens if the building/structure changes ownership?

On sale:

Unlike previous rules there will be no claw back of the allowances claimed and any remaining allowances claimed by the purchaser for the remaining time at the same rate. The seller will need however to produce an “allowance statement” and keep records of the qualifying costs.

However, it is expected that when calculating the capital gain or loss on disposal of the building/structure the allowable cost of the asset is reduced by the relief claimed to that date therefore potentially increasing the chargeable capital gain.

On acquisition:

The purchaser will be able to continue to claim relief for the rest of the 50 years as long as they use the property for qualifying time.

What should I be doing?

This is a potentially valuable relief and should not be overlooked.

If you are building or renovating a building/structure that may qualify, the costs need to be clearly identified and records maintained. It will still be more tax efficient to make a claim for capital allowances wherever possible as the tax relief is faster, but you may now be able to claim SBA where previously there was no tax relief.

If you are acquiring a building/structure it will be important to understand if the seller has claimed SBA or could have, or to identify what element of a purchase from a developer relates to the building and what to the land. This should be built into any discussions at as early a stage as possible.

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Posted in Blog, Property & construction

Lucy Mangan - ACA, CTA

Partner

To find out more about the new capital allowances for buildings and structures and how you may be able to access them, contact Lucy Mangan.