Capital Allowances - Seizing The Opportunity

The property taxes landscape is forever changing and evolving; as a consequence, it is critical that we understand the updates, as well as remembering the basics. As a follow up to their successful Property Taxes Seminar in November, here Leathers LLP provide an overview of one particular area which provoked the most discussion on the day and one which many take for granted Capital Allowances on Property Transactions.

S.198 Elections

Capital allowances on the sale/purchase of a commercial property is a subject which many professional advisers and their clients overlook or simply do not fully understand.

In April 2014 (as part of the Finance Act 2012), new rules were introduced in relation to fixtures and fittings within buildings. The full detail of the rules is outside the scope of this article, however, to briefly summarise, the new rules required both the seller and the purchaser to comply with the following:

Fixed Value Requirement The value of fixtures in buildings for capital allowances must be jointly agreed under a ‘s.198 election’, within two years.

Pooling Requirement The seller must include all qualifying fixtures in their capital allowances pool.

Maximising Relief Allocations to Fixtures and Fittings

Increasingly, we are seeing transactions where the value attributed to fixtures and fittings in a building is only £1. Perhaps this is due to the perceived complexity in the rules or a function of fee pressure both for solicitors and advisors on property transactions.

In many cases, a £1 allocation may mean one or both of the parties to a transaction are missing out on a significant amount of tax relief.  If it is possible to allocate a proportion of the sale proceeds to fixtures and fittings, there is scope for a future capital allowances claim.

In 2015, the Law Society released a Capital Allowances Report, which estimated that between 1 April 2014 and 31 December 2014 an estimated £1.6 billion of capital allowances were missed.

Furthermore, the report wasn’t particularly complementary as to the wider understanding of the rules within the professional community:

“Many in the profession are not fully up to speed with their new obligations, and are exposing themselves to risks ranging from loss of fee income to litigation. Very few commercial property transactions giving rise to capital allowances appear to be handled in line with best practice. This is not merely a matter of risk to the profession. It’s a missed opportunity to build expertise, relationships and new business.”

What to Look For?

Here at Leathers, we always work closely with our clients and their lawyers to ensure opportunities for tax relief are identified, and ensure that best practice is followed. In terms of the thought processes we adopt when considering a property sale, we would look to review the following areas: 

Have all available capital allowances been claimed on the building?

Has a value been agreed for the fixtures of the building as part of the sale agreement?

Capital allowances claims do not reduce the capital gains base cost; there is no adverse impact to claiming capital allowances can proceeds be allocated to fixtures and fittings?

Has s.198 election be made in accordance with the requirements of the legislation in terms of format and content?

Have previous claims been reviewed?

What the optimum position for the seller/purchaser?

We take a proactive approach in relation to property transactions and look to engage in the process from the outset. Ensuring the maximum level of tax relief from capital allowances is claimed at the earliest opportunity, should far outweigh the level of professional fees incurred, and gives flexibility for future sales.

As with much of our advice, whilst the underlying aspects may seem complicated, we keep the message simple; ask an expert as soon as possible and look at a transaction from all angles, you may qualify for a significant amount of additional tax relief.