Capital Allowances – are you missing out on Tax Relief?

If you own commercial property, are about to sell commercial property, or are about to buy commercial property, recent changes to legislation on Capital Allowances may mean that you are not obtaining all of the tax relief available to you.

This may have been mentioned to you in the past but you took a decision not to incur a fee to establish a claim because it was always possible to revisit this at a later date and to make your claim.

From April 2014 if the correct capital allowance procedures are not followed when acquiring property entitlement to tax relief will be permanently lost.

The changes that were introduced in the FA 2012 are fully applicable following a two-year transitional period, which began in April 2012.

These rules have since April 2012 required vendors of property, who have claimed allowances on fixtures, to enter into a formal agreement with the purchaser to fix the value of those fixtures within two years of sale.

Furthermore as of April 2014 there is a further pooling requirement. This means that any vendor, who is entitled to make a claim for allowances in respect of fixtures, must quantify and pool the qualifying expenditure to enable a purchaser to claim allowances under the ‘fixed value requirement’.

Although there is an exception is if the seller is outside the charge to tax and can obtain written statements as CAA 2001 s 187A (8).

As an owner of commercial property why should I make a claim now?

  • Obtain tax relief now to reduce current and future tax liabilities.
  • Potentially obtain a tax refund from an earlier period.
  • Negotiate a higher sale value for my property due to availability of tax allowances to the purchaser.

What action is required?

For all commercial property owners and particularly any who are likely to sell a commercial property after April 2014 it is important to start collating the capital allowances history as soon as possible. There are currently many owners of property who are entitled to claim allowances but have failed to do so.

Nevertheless, all owners should as a minimum collate records of what the capital allowances history is. This will enable them to be helpful and cooperative to buyers and could be used to secure a higher value on sale. A property with tax relief will be more attractive to a tax-buying owner than one without.

Furthermore, buyers of property may wish to consider clauses in sale contracts requesting sellers to pool or claim full allowances within two years of sale.

Added complexity

When buying properties from receivers, it can be challenging to establish the tax history. During consultations HMRC considered that all receivers will be under a duty to obtain the best possible price for a property and that they would provide tax history, access to tax computations and willing to enter into tax elections where claims have been made. In practice this is rarely the case.

An example of the new rules

ABC Limited purchases a new hotel as an investment in 2013 for £2m.

In March 2014 Company ABC decides to sell the property as it considers that a better return of shareholders funds could be achieved elsewhere.

CDE limited acquires the property in April 2014 for £2.2m. Their solicitor’s make enquires regarding capital allowances in the standard property enquiries. The responses are that no capital allowances have been claimed and the sellers have no further information.

In accordance with the mandatory pooling rules applicable from April 2014 as the seller was within the charge to corporation tax and could have claimed capital allowances, but did not. CDE Limited will be denied the ability to claim allowances on the fixtures in accordance with (CAA 2001 ss 187A–187B).

Based on costs of £2m there could potentially be allowances of £800,000 lost.

In order to secure those allowances the buyer would have needed to persuade the seller to quantify and pool the allowances or to quantify and claim the allowances.

Further they need to persuade the seller to sign a tax election for an agreed amount. Although there is a two-year window to agree the election, in practice it needs to be considered very early in the sale process.

How we can help

If you already own or are acquiring commercial property, we can assist to ensure that valuable tax relief is not lost, helping you to understand both the buyer’s and the seller’s position and steps necessary to avoid losing out.

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