Peter Rayney explains that care must be taken when buying commercial buildings, to ensure valid capital allowances claims can be made on their fixtures and integral features.
When a business buys a commercial building, it is very important to ensure that it is able to claim the appropriate amount of capital allowances on its various fixtures/integral features.
These would include such items as air conditioning, boilers, cabling, ducting, demountable partitions, fire alarms systems, general lighting, lifts, piping, sanitary ware, and so on. Based on recent data collected by ‘capital allowance’ boutique firms, the amount allocated to these items might be as much as 20% to 25% of the cost of most modern commercial buildings.
Under the basic rule, the buyer’s claim would be based on a ‘just and reasonable’ apportionment of the total purchase price (under CAA 2001, s 562). However, following the Finance Act 2012, special rules will frequently apply where a property containing fixtures/integral features is bought from a seller who has previously claimed capital allowances on them.
The ‘just and reasonable’ apportionment rule would apply, for example, where the property has been purchased as a ‘new building’ from a property developer/construction company. In such cases, buyers should ensure that they have sufficient ‘cost’ breakdowns to enable them to determine the various items of fixtures and integral features.
Requirements for a valid capital allowances claim
A buyer can now only claim capital allowances on fixtures integral/features acquired in a commercial property provided:
- the seller has ‘pooled’ all the relevant fixtures before the sale (or has claimed a 100% allowance) - ‘the mandatory pooling’ requirement; and
- the seller and the buyer agree the ‘consideration’ value of those fixtures integral/features under a CAA 2001, s 198 (or s 199) election within two years of the purchase being completed – ‘the fixed value requirement’.
However, where the parties are unable to agree the value allocated to fixtures/integral features, they can apply to the First-tier Tribunal to determine the amount (again, within the relevant ‘two-year’ period).
The ‘mandatory pooling’ rule only applies where the seller is entitled to claim capital allowances on the fixtures/integral features. The seller satisfies this requirement by allocating the relevant expenditure on fixtures/integral features to a ‘pool’ in a tax period before it ceases to own them (CAA 2001, s 187A). The seller can therefore meet this condition, for example, by pooling the expenditure in the period the sale takes place.
If the ‘mandatory pooling’ and ‘fixed value’ requirements are not satisfied, the deemed capital allowances value for the buyer is ‘nil’. This effectively means that the buyer (and any subsequent purchaser of the building) is unable to claim capital allowances on the fixtures/integral features. This is likely to reduce the ‘value’ of the building to a prospective purchaser!
The section 198 election
The section 198 election offers certainty since the seller and the buyer will bring in the same value for the disposal and acquisition for capital allowance purposes. However, the agreed value can never exceed the seller’s original cost; but within this constraint, the parties can have considerable flexibility on the relevant amount.
The amount agreed in the section 198 election effectively allocates the capital allowances between the seller and buyer (see example below).
Example: Section 198 election
Tickling Sticks Ltd (TSL) acquired its office premises in London in 2009 at a cost of £14 million. It was agreed with HMRC that £2 million related to the fixtures and £1 million related to integral features. TSL claimed capital allowances on these amounts.
In June 2018, TSL sold its office premises to Knotty Ash Consultants Ltd for £18 million. The sale and purchase agreement provided that the parties would enter into a section 198 election with £2 million allocated to the fixtures and £0.4 million to the integral features.
Since the original cost of the fixtures was £2 million (the maximum amount that could have been included), TSL’s capital allowances on that element are fully clawed back since £2 million is the disposal value on the ‘pool’. On the other hand, it will effectively retain allowances of £0.6 million (i.e. £1 million cost less £0.4 million disposal value) on the integral features.
Planning Tip:
Agreement of the relevant capital allowance points should always take place as part of the standard pre-contract enquiries for the purchase of commercial properties.
Peter Rayney explains that care must be taken when buying commercial buildings, to ensure valid capital allowances claims can be made on their fixtures and integral features.
When a business buys a commercial building, it is very important to ensure that it is able to claim the appropriate amount of capital allowances on its various fixtures/integral features.
These would include such items as air conditioning, boilers, cabling, ducting, demountable partitions, fire alarms systems, general lighting, lifts, piping, sanitary ware, and so on. Based on recent data collected by ‘capital allowance’ boutique firms, the amount allocated to these items might be as much as 20% to 25% of the cost of most modern commercial buildings.
Under the basic rule, the buyer’s claim would be based on a ‘just and reasonable’ apportionment of the total purchase price (under CAA 2001, s 562).
... Shared from Tax Insider: Getting The Benefit Of Capital Allowances On Property Purchases
