One of the most neglected opportunities to save tax is in the field of capital allowances for commercial (i.e. non-residential) property. The opportunity exists both for landlords and for businesses with their own premises. As a rule of thumb, a person spending money on buying or extending a property may save up to 10% of the cost through these tax breaks.
The allowances are given for “fixtures” – broadly speaking, plant or machinery that is permanently attached to the property. Since the definition was extended in 2008, tax relief is available for the full cost of the electrical and plumbing work, as well as for more traditional plant and machinery such as lifts, toilets or fitted furniture.
So why are the opportunities missed? There are three main reasons:
1.the technicalities are complex and all too often simply misunderstood or misapplied;
2.the three professionals involved in a property sale (lawyer, accountant, surveyor) may each assume that someone else is addressing the capital allowance issues;
3.nobody will ever know: HM Revenue & Customs will not be troubled if no claim is made, and the owner may simply be unaware of the potential tax savings (though recent changes in the tax legislation will increase awareness).
Allowances can be claimed even if a property was bought many years ago (as long as it is still owned for at least part of the year of claim). If you own a commercial property and have not claimed significant capital allowances, do some digging to see if you could save tax.
To add further complications, the rules were changed from April this year, and will change once more from April 2014.
Until now, the buyer of a property has often been advised to keep quiet about capital allowance opportunities until the deal is done. By default, the tax benefit of the allowances has tended to pass from seller to buyer unless the parties agree at the time to a different arrangement. A well advised seller will always try to maximise his claim before a sale, and then to protect the value by signing an election with the buyer.
A partnership paid £2 million for the construction of an office and identified £420,000 of qualifying fixtures. The property was sold in March 2012 for £3 million. Typically, there will be a capital allowances disposal value of the full £420,000 (so the vendor only enjoys a cash flow advantage). However, an election can fix that value at anything between £1 (giving the benefit of all the allowances to the vendor) and the £420,000.
The figure agreed for an election is up to the two parties. It will depend on their respective negotiating positions, on how well advised they are and on how valuable the allowances are (e.g. they may be of no interest to a vendor with trading losses).
If the vendor has claimed allowances, the key change since last April is that the parties will have to reach a formal agreement over the transfer value. If no election is signed, the matter will be determined by the tax Tribunal (failing which the purchaser will not be able to claim any allowances at all). From April 2014, a new owner will not be able to claim allowances on a property at all unless the old owner has first included the value of the fixtures in a capital allowance claim.
Practical Tip :
When buying or selling commercial property, make sure you know which professional is responsible for the capital allowances, and satisfy yourself that the adviser is competent in this technical area.