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What is capital allowance tax relief on property?
When buying or selling commercial property, capital allowances can make a significant difference to the overall value of the deal. But as is often the case, neither party to the transaction may be aware of the full extent of any potential capital allowance tax relief on the property in question.
Whatever the nature of your business, your market sector or the type of commercial property, it makes financial sense to understand the full extent of your eligibility for what is one of the more generous tax reliefs currently available to businesses.
Capital allowance tax relief on property is available to all UK taxpayers – individuals, companies, partnerships and non resident landlords – owning commercial property either privately or as a limited company, irrespective of whether the property is owned as an investment or for use in a trading business.
Certain trigger events should prompt property owners and/or potential purchasers to dig deep and understand the full position of an asset’s eligibility for capital allowance tax relief. Such scenarios could include:
But maximising your claim for capital allowances requires expertise in reviewing both ‘the property and the paperwork’.
Looking specifically at the sale of a commercial property, ascertaining the full value of capital allowances on the building can deliver benefits from both the vendor and purchaser perspective:
Capital allowances therefore should form an integral and potentially highly valuable component in the property sale and negotiation process.
In order for the purchaser of a commercial property to take advantage of capital allowances on the assets in question, there is a requirement for the seller – who could have during ownership made the claim – to ‘pool’ the available allowances.
It is a mandatory requirement for any potential capital allowance on property claim to be passed to the buyer. Where the allowances are not pooled, the buyer and any future owners of the asset will not be able to claim the capital allowances.
Joint election requirement
Parties to a property sale will need to agree the value attributable to qualifying items within the sale and ensure they do not have an unexpected ‘claw back’ of the allowances they have previously claimed. This is usually carried out by way of a joint tax election within two years of the transaction.
Full and accurate information on qualifying items should be submitted as part of the property sale documentation and negotiation.
Fixtures within commercial buildings are where we typically see the most untapped potential for tax relief.
Since there is no exhaustive list of what constitutes fixtures or integral features, it becomes a challenge for property owners to catalogue and calculate the full breadth of qualifying items. Professional advice will ensure you achieve the balance between claiming for the broadest scope of eligible assets, while ensuring all items claimed for would satisfy HMRC scrutiny.
Examples of assets eligible for capital allowances include:
There will also be nuances depending on the type of business and property and what is deemed ‘essential’ to the business. For example, a hotel – in addition to claiming for furniture and soft furnishings may also be able to claim for items purchased to create ambience and atmosphere.
Wider opportunities to claim beyond core fixtures and integral features may also exist, as determined by the relevant fact pattern. For example, certain expenditure incurred outside an election and prior to the introduction of ‘integral features’ in 2008 may be eligible for additional allowances. This is a complex set of rules, and advice is recommended.
It is also worth noting that there are equally many items that do not qualify for capital allowances. For example, items deemed part of the ‘fabric of the building’; windows, doors, fixed partitions and tiling.
Retrospective capital allowance claims can be made by the new purchaser at any time, since the claims are not subject to a limitation period.
A claim can extend the full period of investment in the asset stretching back across all previous owners – which could be highly lucrative in tax terms for the new owner, provided as above allowances are pooled prior to the transaction.
Interestingly, there is also no requirement to exclude the value of capital allowance claims from allowable deductions against CGT.
Effectively reviewing the capital allowance status of a property is a valuable yet often overlooked exercise – with the potential to provide negotiation leverage within a transaction and since fixtures can contribute notably to the value of an asset.
Taking advantage of capital allowance tax relief on property however requires forward planning and due diligence on both the part of both the vendor and purchaser.
Since the ability to claim capital allowances on these fixtures only exists where the vendor has ‘pooled’ the fixtures expenditure, and where both parties have agreed the value attributable to the fixtures, the claim will be lost to the purchaser and any future owners if these requirements are not met.
Whether you are buying or selling commercial property, Enterprise Tax can advise on the capital allowance position in relation to property transactions, to assist you in your commercial negotiations.
We can help by reviewing your purchases and assets against periods of account. We will identify and categorise the full extent of qualifying expenditure and support you in compiling the relevant evidentiary documentation and submitting your claim to HMRC.
Our services include:
For more information, please contact one of our chartered tax advisers.