Capital allowances are a form of tax relief which can be utilised by anyone purchasing a commercial property as well as existing property owners who hold property on a capital account. To get technical for a second, they are available because depreciation on certain capital items is not an allowable tax deduction when calculating taxable profit and loss. Consequently, capital allowances step into the breach and provide tax reliefs as an incentive to invest, in place of depreciation, and reflect the fact that use of plant and machinery results in a certain amount of wear and tear on such items which can then be reflected in the taxable profits of the business.
When can it be claimed?
The tax relief available will be limited by the tax history of the property. It is therefore important, at the contract stage of the purchase process, to establish such history in order to determine the extent of the relief a purchaser can subsequently claim. The capital allowance values will need to be established prior to exchange of contracts as an election quantifying the claims to date must be made prior to completion. This should form part of the usual due diligence undertaken by your solicitors.
For those who already own such property, the process can be commenced at any time, however there is a limit on retrospective claims so owners should act sooner rather than later so that they can realise the benefit as quickly as possible.
How is relief established?
When purchasing, the relief is claimed on completion by submitting an ‘election’. This election is a contractual agreement between the buyer and seller. It will record those items and the level of relief claimed against each item to date by the seller. This will limit the level of subsequent relief available for the buyer. However, the good news for buyers is that this relief is very rarely claimed by a seller, meaning a buyer is not limited by any previous tax claims of the seller and is therefore free to submit a claim based on the just and reasonable apportionment of the purchase price, although this is subject to any election that the buyer may have entered into on completion. Quality legal advice when negotiating the contract is therefore essential.
For existing owners, a survey should be undertaken of all qualifying items and a claim submitted based on a just and reasonable apportionment in relation to the value of the building.
What items can be claimed?
Essentially, relief is claimed on plant and machinery, which includes fixtures in the building. Such fixtures qualifying for relief can be a significant proportion of the property’s value and therefore represent a substantial saving. Not all buildings will yield such valuable savings, an industrial shed for example, will be at the lower end of the spectrum while a hotel will produce extensive savings. Fixtures are split into two categories of claim (‘pooled’), a main pool and a special rate pool which attract different rates of relief. The actual value of the claim is subject to complicated methods of calculating the disposal value of the fixtures, however this may be simplified when purchasing a building by using an election.
The benefits that can be achieved from the utilisation of this relief can be significant but yet it is surprising how little this is actually used in the commercial world. Given the recent changes in the way capital allowances operate it is essential that a buyer take specialist advice when purchasing a building. If the procedure for preserving the right to claim such allowances is not observed in full, that right to claim can be lost, which could result in a significant loss to a purchaser. Here at Short Richardson and Forth our lawyers can provide such expert advice to ensure you do not lose out on any such potential tax break when purchasing a commercial property.