A capital idea!
For many, Capital Allowance is no more than a section within the preliminary commercial property standard enquiries and, assuming that the response from the other side is as innocuous as is regularly the case, nothing further will arise. In a nutshell, Capital Allowance is a tax concession which allows businesses that own commercial property the opportunity to offset the depreciation in value of capital items against its tax bill. Certainly, it has rarely been a significant factor in the sale and purchase of properties.
As the law currently stands, Capital Allowances can be claimed against various expenditure, the most common being plant and machinery, business premises renovation and flat conversion. There is 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. On a £10m purchase, £1.3 million could be offset against the company’s tax bill. Suddenly, understanding Capital Allowance may seem more worthwhile.
Surprisingly the Government has no centralised system for recording which properties have been claimed against. It was the responsibility of the taxpayer to ensure that the allowances were correct and not exceeded. However, from April 2014 tax changes are being implemented that will see this overlooked area become a bigger consideration for both buyers and sellers alike. Far from being the once harmless business incentive tax scheme that could save those in the know a few thousands off their tax bill, the Revenue are clamping down and ensuring that the risk of ‘double claiming’ and ‘over claiming’ is removed.
From April this year, any disposal of a commercial property must come with an election notice of the value of all pooled qualifying expenditure since 23 July 1996, and be lodged within 2 years of the disposal. This means that any expenditure that has been claimed as an allowance against the property by former owners must be evidenced and recorded. The buyer and seller must agree what, if any, claimable sum is to be passed on to the buyer for their benefit. Most importantly, a seller is under no obligation to pass on any claimable allowance, even if some remains. For the unwary buyer any possible Capital Allowance relief could be kept by the seller. A canny seller could then continue claiming against the Capital Allowance in later tax years until the whole sum is exhausted, even though they no longer own the building! It is obviously in the buyer’s interest to ensure that any claimable allowance is passed on. If it is known that there is a significant amount of qualifying expenditure it may even be a part of negotiations over the purchase price.
The changes can’t be ignored either. Failure to agree a value and prepare an election notice will mean that any further claims against the building are prevented absolutely. Neither the seller nor the buyer can use any unclaimed amount which could mean that the value of the property is reduced. 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.
The rules are also different if either the Buyer or the Seller is a non tax payer, such as a charity. Specialist tax advice is therefore key to avoid losing out.
Partner
Commercial Property
BLaidler@LawBlacks.com
0113 227 9209
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Beth Laidler
