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Capital Allowances and Property Acquisitions

Commercial property allowances

The acquisition of a commercial property gives the buyer the chance to unlock value through the working of the capital allowances regime.

Whereas taxpaying individuals and companies readily understand that ‘plant & machinery’ allowances are available on the purchase of capital goods that perform a function in their business, the opportunity to claim allowances when acquiring property, either new or second hand, is commonly overlooked. Every commercial property has qualifying plant and machinery embedded in it, including electrical systems, plumbing, air-conditioning and the like which can be subject to a claim in almost exactly the same way as loose capital items such as computer equipment. Such embedded assets, legally part of the premises, are collectively known as ‘fixtures’.

Depending on the nature of the building and its specification there will be a range of fixtures on which capital allowances can be claimed. Some buildings, such as hotels and care homes have more of these than others and the value of the tax allowances can be material to the property transaction.

As a result of a perception within HMRC that the existing fixtures regime was leading to inflated or double-counted claims, the latest major revision to capital allowances legislation was introduced by Finance Act 2012. Rather than simplify matters the changes added further complexity to an area of tax law that is often misunderstood, even by accountants in practice.

Problems with fixtures claims

The confusion is not confined to tax practitioners, with HMRC themselves often failing themselves to implement Revenue guidance in the area. Technical complexity is certainly one of the causes of the mishandling or failure to make claims but the reasons are not confined to such difficulty:

Interaction with capital gains

Many taxpayers and a worrying number of their advisers believe that the making of a fixtures claim in respect of a commercial property reduces the capital gains base cost attributable to the premises and increases the tax payable on an eventual disposal. Somewhat counter-intuitively this is one of the few areas in taxation where an expenditure ‘double-dip’ is available. Section 41 TCGA 1992 specifically doesn’t require an adjustment to base cost by reference to capital allowances claims unless the property is sold at a loss.

Often linked to this misconception is the belief that on eventual sale, all the fixtures allowances claimed in respect of the property will be clawed back. Again this need not be the case as the vendor can elect with the purchaser under the ‘fixed value requirement’ for only a nominal part of the sale price to be apportioned to fixtures and hence continue to benefit from eligible expenditure even if the asset itself is no longer owned.

The role of professional advisers 

Taxpayers rightly understand that they should employ the services of a solicitor when dealing with commercial property transactions but not all lawyers are comfortable when dealing with the capital allowances aspects of Commercial Property Standard Enquiries (CPSEs). In many cases solicitors’ CPSE engagement terms exclude responsibility for the capital allowances aspects of a property transaction.

In practice, the issue of allowances can easily fall between the roles of lawyer, accountant and surveyor such that the matter may be dealt with superficially or in worst cases not at all, leaving both buyer and seller at risk.

Timing

Often in practice, accountants dealing with a client’s tax compliance affairs will become aware of a property transaction far too late to optimise a claim. As allowances are given in respect of eligible expenditure incurred this can give rise to the mind-set that a claim can only be considered once the asset has been acquired rather than working with the taxpayer while the transaction remains ‘live’.

Additionally many taxpayers traditionally only consider capital allowances at the point that the tax computations are being prepared which could be as long as eighteen months or more after a property transaction. At that point the priority can too often become meeting a filing deadline rather than enhancing the client’s tax position. 

Best practice

What then should be the best approach to a commercial property transaction to ensure an optimal fixtures claim?

As with any material transaction, due diligence is a must and the tax practitioner should ideally work alongside the client’s other professional advisers beginning at the transaction planning stage.  With a proposed property acquisition the components of the work would include:

• Initial report outlining options and tax benefits based on the nature of the building and the tax status of the seller;
• A review of the seller’s capital allowances history in relation to the property, quantifying benefits and detailing negotiation points;
• Taking steps to protect and maximise the buyers claim, including advising on elections and valuations;
• Preparation of an auditable claim for allowances for filing with HMRC.

Taxpayers who wait to address such issues only when completing their annual tax return will almost certainly have missed the boat.

Mike Chapman, Knill James mikec@knilljames.co.uk