Partner Article

A Capital Idea! Understanding recent changes to Capital Allowances

In a nutshell, Capital Allowance is a tax concession,giving businesses that own commercial property the opportunity to offset the depreciation in value of capital items against its tax bill.

Historically, Capital Tax Allowance was rarely asignificant factor when it came to the sale and purchases of property. It was simply seen by most businesses as a standard part of the procedure that, should the other party be agreeable, wouldn’t cause any issues.However, as of last month, the law changed, meaning that Capital Allowance should be a much greater consideration when selling commercial property assets…

Capital Allowances can be claimed against various expenditure, the most common being plant and machinery, business premises, renovation and flat conversion. There’s a standard formula to work out the value given to the qualifying assets but, as a rough guide, it could be around 10 -15% of the purchase price. By way of example, on a £10m purchase, around £1.3 million could be offset against the company’s tax bill. Suddenly, an understanding of Capital Allowances may seem more worthwhile!

So, how did the law previously stand? Surprisingly, the Government had no centralised system for recording which properties have been claimed against and, up until now, it was the responsibility of the taxpayer to ensure that the allowances were correct and not exceeded. However, the new changes will see this once overlooked area become a more significantconsideration for both buyers and sellers. Far from being the harmless business incentive tax scheme that could save those in the know a few thousands on their tax bill, the Revenue is clamping down and ensuring that the risk of ‘double claiming’ and ‘over claiming’ is removed.

How does this affect you if you’re selling?

Under the new rules, if you’re planning to sell any commercial property, it must come with an election notice of the value of all pooled, qualifying expenditure since 23 July 1996, and be lodged within two years of the disposal. This means that any qualifying expenditure must be evidenced and recorded and an election made. If you’re selling a property, you and the buyer must agree what, if any, claimable sum is to be passed on to the buyer for their benefit. It’s important to remember that as a seller you’re under no obligation to pass on any claimable allowance, even if some remains. A canny seller could therefore pass on a nominal sum to the buyer and continue claiming against the Capital Allowance in later tax years until the whole sum is exhausted, even though they no longer own the building!

How does this affect you if you’re buying?

If you’re buying a commercial property, be aware that any possible Capital Allowance relief could be kept by the seller, so it’s obviously in your interests to ensure that any claimable allowance is passed on. If it’s known that there is a significant amount of qualifying expenditure, it may even form part of the negotiations over the purchase price, so make sure you have all of the property information before making an offer.

Other things to consider

The changes in legislation can’t be ignored. If you fail to agree a pooled value and prepare an election notice it will prevent any further claims against the building. This results in both the seller and the buyer being unable to use any unclaimed amount which,in a worst case scenario, could mean that the sale value of the property is reduced when the buyer then wishes to sell. More significantly for the seller, in the event that the property is sold and more is paid for the claimable assets than was initially written down by the seller, then the Revenue can claw back the balancing charge of any tax allowance deemed to have been overpaid to them.

Finally, be aware that the rules are also different if either the buyer or the seller is a non tax payer, such as a charity or pension trust. Specialist tax advice is therefore key to avoid losing out! You can find out more from our Commercial Property experts at www.lawblacks.com.

This was posted in Bdaily's Members' News section by Charlotte Spowage .