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Property Tax Savings

11 January 2013

As you may or may not know, businesses can claim a capital allowance tax deduction for the proportion of the commercial building acquisition cost relating to ‘fixtures’.  Fixtures include items such as central heating, electrical and lighting systems, water systems, sanitary ware and air conditioning which are typically attached to the building and are distinct from moveable items such as tables and chairs.  Clearly some businesses operate from properties which typically contain a lot of fixtures e.g. nursing homes, restaurants, hotels and retail premises so claiming capital allowances on fixtures can substanitally improve their cash flow and reduce their tax liabilities.

There is currently no time limit within which capital allowances need to be claimed on fixtures. This has led to the ability for ‘late’ claims to be made many years after a property is acquired at a point in time when there may be very little information remaining regarding the capital allowance position of the previous owner, thus leading to the possibility that the total level of capital allowances claimed by past and current owners could exceed the expenditure actually incurred on fixtures – a position which HMRC wish to prevent in future years.

It is against this background that HMRC have introduced new legislation, part of which already applies with the remainder effective from April 2014 onwards.  It is now important for any purchaser of commercial property to:

  • undertake appropriate capital allowance due diligence;
  • ensure, before any purchase agreement is signed, that it contains relevant capital allowance clauses to protect their position; and
  • ensure that the capital allowance position is factored into the price paid for the property.

So what has changed?

The new ‘fixed value requirement’ (already in force)

Where commercial property is acquired, from 1 April 2012 onwards for corporation tax purposes and 6 April 2012 onwards for income tax purposes, and the vendor has previously claimed capital allowances on fixtures in the property and is required to bring a capital allowance disposal value into account, the purchaser (and any future owner of the property) can only claim capital allowances if, within two years of the acquisition of the property:

  • A joint Section 198 election is submitted to HMRC; or
  • An application is made to the First-tier Tribunal to fix the value of the fixtures.

If a purchaser acquires a commercial property from an intermediate owner who was not entitled to claim capital allowances (such as a pension scheme, charity or property developer) and who themselves acquired the property, after the new rules applied in April 2012, from a previous owner who was entitled to claim then, for the purchaser to be able to make a claim, they must now produce a written statement concerning the earlier capital allowance disposal value.

Exceptionally, where the vendor has already brought a disposal value into account (for example on a prior cessation of trade prior to selling the property) the purchaser should obtain a written statement from the vendor of their previous disposal value (‘the disposal value statement’ requirement).

In the past under the old rules, the purchaser may not have enquired into the capital allowance history of a property or required a Section 198 election to be signed.

Under the new rules, it will be very important for any purchaser to ensure that the capital allowance history of the property is established and confirmed with the vendor and that appropriate capital allowance clauses are built into any property purchase agreement before any contract is signed (this might include clauses preventing the seller from submitting a capital allowance claim post completion which could prejudice the purchaser’s position).  Staying silent is no longer an option for the purchaser and it is anticipated that the incidence of Section 198 elections will be much increased under the new rules (as it is assumed that both parties will wish to avoid the cost and uncertainty that an application to a Tribunal would entail).

The new ‘pooling requirement’ – applicable from April 2014 onwards

For commercial property acquisitions from April 2014 onwards, where a vendor could have claimed capital allowances on fixtures in a property, the purchaser (and any future purchasers) will only be able to claim capital allowances on fixtures if the vendor has ‘pooled’ the expenditure (ie noted expenditure eligible for capital allowances in their tax computations but not necessarily claimed allowances on this expenditure) or claimed a 100% first year allowance.

If the vendor has not ‘pooled’ their expenditure, neither the purchaser nor any future owner of the property will be able to claim capital allowances in respect of the existing fixtures and this may then reduce the price a purchaser is prepared to pay for the property.

Conclusion

When buying or selling commercial property it has always been important to ensure that the full tax implications (including capital gains tax, Stamp Duty Land Tax and Value Added Tax) are carefully considered.....and now, with these added complexities, it is even more important to seek proper professional advice.

Please contact Jimmy Hair (jhair@springfords.com or on 0131 440 5000) should you have any queries regarding the above general guide which is intended to give background information and is not a substitute for taking specific advice based on your particular circumstances.

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