If these are not properly addressed at the time of the transaction, then the lost tax relief to the buyer will be catastrophic. This is even expected to reduce the market value of some properties.
The current and established position is that a property buyer may claim capital allowances irrespective of whether the seller has ever made a claim. However, going forward, a buyer will only be able to claim if the seller has ‘pooled’ the capital allowances qualifying expenditure (that is, notified it to HMRC in a tax return). ‘Pooling’ can happen at any time after the seller has built or bought the property, but must be done before the property is subsequently sold on.
Where a seller has not claimed capital allowances, which is commonplace, this will routinely result in an absurd situation. Instead of a buyer simply claiming capital allowances by virtue of having met the longstanding basic requirements to claim capital allowances, the buyer will also need to get the seller to agree to pool the expenditure.
In effect, the seller will have to go through most of the motions of claiming capital allowances and agree to formally pass those allowances on to the buyer. If the capital allowances qualifying expenditure is not pooled by the seller in time then no capital allowances will ever be available to the buyer or any future owner of the property.
‘Fixed Value Requirement’
Currently, when a property changes hands the buyer’s capital allowances claim is generally calculated using a ‘just and reasonable’ apportionment of the purchase price.
Going forward it will be preferred that sellers and buyers agree a section 198 election to value the plant. Or if the parties cannot agree, either party can, within two years of the transaction, unilaterally refer the matter to a tax tribunal for an independent determination. In effect, either party can try to get the other to back down or be forced to incur the trouble and expense of going to a tribunal. Just like the ‘pooling requirement’, if a joint election is not agreed or the amount is not referred to a tribunal in time, then no capital allowances will ever be available to the buyer or any other future owner of the property.
What are capital allowances?
Capital allowances are a valuable form of tax relief available to anyone that incurs capital expenditure when buying, building or making adjustments to commercial property. In the crudest way, capital allowances are a way for the owners of commercial property to reduce their tax bills.
Capital allowances that can be claimed on various commercial properties include properties such as:
Hotels and B&Bs
Nursing and residential homes
Dental and GP surgeries
Factories and industrial units
Filling stations and garages
Depots and warehouses
Haulage yards and transport facilities
Offices and retail stores
According to research, more than 9 in 10 owners of UK commercial property will be due a tax benefit from HMRC as a result of unused capital allowances tax relief.
Why do you not know about unused capital allowances? Firstly, HMRC, understandably, isn’t that keen on alerting too many people to it, especially at a time when the Treasury’s coffers are bare.
Secondly, the problem, historically, has been that identifying capital allowances within commercial properties is extremely complex, so much so that even ‘normal’ accountants will only scratch the surface.
Indeed, while ‘normal’ accountants will claim on more obvious items such as shutters and curtains, fire extinguishers and carpets, generally speaking they will not drill down to the items where the far more significant costs to a business lie. These might include cabling, air conditioning, heating, lighting and security systems. Specialist capital allowance experts on the other hand, draw on a far more detailed understanding of capital allowances practice and law and carry out an in-depth forensic survey of the property in question.
What action should you take?
If a property sale or purchase is contemplated, tax payers and their advisers are strongly urged to promptly obtain expert capital allowances advice and to safely navigate their way through the new rules.
By David White, Partner, Charterhouse, based in Beaconsfield
David White is an equity partner in Charterhouse a practising firm of Chartered Accountants based in Beaconsfield and Harrow. David is Charterhouse through and through having been with them for 30 years...