When a business makes a capital investment, the expenditure is recorded in the business accounts on the balance sheet as a fixed asset.  These assets will then over time depreciate, however the business is not able to make any deductions for this depreciation when calculating its profit and loss. Taxpayers are however able to claim tax relief through capital allowances on qualifying capital expenditure.  Generally, the deductions will be spread over many years.

There are various types of expenditure which can qualify for relief and what is classed as qualifying will depend on the type of allowance claimed, which can fall under Plant and Machinery, Structures and Buildings, Mineral Extractions, Research and knowhow, Patents and Dredging allowances. 

Capital allowances are available to property occupiers and investors and both income and corporation taxpayers.  They are a valuable incentive to almost all businesses.  The allowances are deductible when calculating income or profits (depending on whether the taxpayer is a person or a corporation) for a chargeable period.  The allowances are not given automatically and must be claimed in a tax return for the relevant period.  The time limit for claiming capital allowances is the time limit for making or amending a tax return.

In order to claim capital allowances, taxpayers must group items into ‘Pools’. Each pool will attract different rates of allowance depending on the type of asset.  For example, plant and machinery will be classed as a main pool but features which have a life of longer than 25 years would fall within a special pool on which the rate will be different.  In general, if a capital item on which capital allowances have been claimed is disposed of, the taxpayer will then need to account for the disposal value accordingly.

If you have recently incurred capital expenditure to buy, build or refurbish commercial property and you are a taxpayer then it is likely that you will be able to benefit from capital allowances.

When purchasing a building, capital allowances must be identified and recorded at the point of purchase and sale of the property.  If this is not done the opportunity to claim for these items may be lost forever.  Purchasers may only claim for integral features and fixtures for which the previous owner did not make a claim. Further claims can be made where the building is extended or new elements are introduced to the building, but not in respect of pre-existing machinery for which the seller has already made a claim.

When a property is sold if the seller has been claiming capital allowances in respect of the plant and machinery within a building, it will need to work out what part of the sale proceeds are attributable to the assets which qualified for allowances.  This figure will then be used by the seller in their capital allowance computations.

As part of the purchase and sale negotiations, the parties will be required to enter into a Section 198 election under the Capital Allowances Act 2001 which fixes the value of the fixed assets at that point of sale and will enable the purchaser to get the benefit of any unclaimed allowances. The general position for working out the amount of sale proceeds of a building which relates to assets qualifying for allowance is to carry out a just and reasonable apportionment.

The parties will generally make the election for each pool of assets ether at £1 or at a tax written down value which is the balance of expenditure in respect of which capital allowances have not yet been claimed.

The sooner the capital allowances position is clarified during the sale process the better.  If capital allowances are not address during the sale negotiation it can be very difficult to obtain the seller co-operation post completion, as the seller is no longer engaged and there is no financial incentive for them to address the capital allowances position.

There is a two-year deadline from the date of completion to supply HMRC with a completed election to either pass capital allowances to the new owner or for the prior owner to retain the benefit of them.  If this is not done the ability to establish capital allowances is lost.

There are two options when selling a property; either the seller can retain the benefit of the capital allowances when the property is sold.  This is done by a s198 election with a value of £1.  The effect of this will be to restrict any capital allowances claim the new owner can make to £1 and allows the former owner to continue to claim the capital allowances which have been identified whilst he owned the property, after the sale has completed.

The second option is to pass any unclaimed capital allowances to the new owner.  This is done by completing a s198 election with the tax written down value of the capital allowances at the point of sale.  This would be a point of negotiation and will mark a property as a more desirable to potential property investors.

If the parties make the election at £1 the seller will continue to benefit from any allowances which have not been claimed at the point of sale but the purchaser will be unable to make any claims for allowances in relation to the purchase of the property.

The purchaser should always check whether the seller has claimed all that it was entitled to during its ownership and if it has not done so, the purchaser should ensure that the purchase contract obliges the seller to pool its expenditure in order to preserve the capital allowances, which will otherwise be lost.  It is always important to ensure that proper and full due diligence enquiries are undertaken and fully reviewed when entering into a property transaction.  It is estimated that incorrect replies to enquiries regarding capital allowances, which do not identify clearly whether the seller has previously made a capital allowances claim and if so the extent of such claim, have led to up to £80 billion of unclaimed capital allowances being lost.

Where leases are granted, allowances in relation to the fixtures in the building will remain with the landlord unless the lease is granted at a premium and an election 183 is made for the allowance to pass to the tenant.  However, tenants will usually be able to claim allowances in respect of expenditure they have incurred on items qualifying for allowances as part of their fit out of the premises.  Any contribution by the landlord to the fit out of the property needs to be carefully structured so as not to prejudice the availability of the allowance for the tenant.

The commercial property team specialise in the sale and purchase of all types of commercial buildings, acting for both buyers and sellers, being either individuals or corporate entities.  If you would like to discuss a sale or purchase of a property, please contact Nicolle Marchant by email or on 01494 893514.