Buying commercial property? Here’s what you need to know so you don’t miss out on capital allowances.
Capital allowances apply to all properties across the commercial sector, and the relief often comes back in the form of a tax rebate and an ongoing reduction in your tax bill. When you are purchasing a commercial property, it’s important you benefit from what is available to you, such savings can make a property purchase much more viable.
Undoubtedly, there is a lot to consider when purchasing a commercial property. This article aims to give you confidence that you have considered all you need to, at the right time, from a capital allowances standpoint, so you can focus on the rest of the purchase transaction.
While not often front and centre of a transaction, it’s not uncommon for a purchaser to complete a purchase and find they missed the opportunity. It’s imperative you know the steps to take to secure a valuable claim for capital allowances.
When it’s more straightforward:
The ideal situation (from a capital allowances perspective) is when buying a property from an entity that is not subject to UK tax, and therefore has no entitlement to claim allowances during their ownership of the property. Typically, this includes buying from:
- a charity
- a pension
- a developer (new & unused property) or
- a residential property (that you’re intending to use commercially)
If you’ve confirmed one of the above, nothing needs to be done prior to completion of the purchase transaction. You can arrange for a capital allowances exercise after completion, without interaction with the vendor, and a significant number of allowances will likely be available. To benefit from the most generous allowances, you need to claim the allowances within 2 years of the completion of the purchase transaction.
When it’s more complicated:
More often than not, the vendor will be a company or individual who used the property commercially, either themselves or as a landlord. In these cases establishing entitlement to claim requires due diligence, looking into the claim and ownership history of the property.
Additionally, the capital allowances legislation can complicate claims in relation to the fixtures present in a property. Only the entity with first entitlement to claim a fixture can make such a claim. Where the vendor’s profits are chargeable to UK tax, the vendor will usually have first entitlement (except where they have held the assets since before the introduction of the relevant allowances), so the purchaser will not be able to claim independently.
The key mechanism here is the s198 election. This election lets a buyer and seller agree the value of qualifying assets that will be transferred as part of the purchase. This value can be fixed at anything from £1, to the original value of the assets and of course becomes a negotiation point between the parties. Its key to consider the implications of this before completion.
There a few cases to consider and resolve before contracts are finalised:
The vendor could have claimed but didn’t – If so then the buyer should request a contract clause be included, allowing a capital allowances exercise to be undertaken at the buyer’s expense, on behalf of the vendor, and any allowances be transferred over in the election. From the vendors perspective, this is tax neutral, and the buyer gets the benefit of the allowances in the property. If this is not included at contract stage, there is no obligation for the vendor to cooperate with such an exercise post-completion.
The vendor claimed first year allowances – Where the vendor has taken advantage of reliefs that allow 100% of the allowances to arise immediately (like the Annual Investment Allowances, or Super Deductions), any amounts included in an s198 election to be transferred over will result in balancing charges for the vendor. They will be motivated to complete an s198 election with a value of £1 (the minimum), effectively meaning no allowances are transferred to the buyer.
The vendor has allowances in the pools – Allowances added to the capital allowances pools provide value over time at 18% or 6% per year. In these cases, how much of these allowances are transferred is purely a negotiation point, but in reality, the allowances are much more valuable to the buyer than the seller. This is because the balance of the pools will crystallise for the vendor slowly over time, as above; but for the buyer, they can claim first year allowances on amounts transferred in an s198 election, meaning an immediate benefit of the claim.
Understanding which situation applies to your purchase, and what is the best course of action, can be a tricky task, especially when more often than not, the Capital Allowances section of the Commercial Property Standard Enquiries is completed incorrectly. Here at YesTax we can provide free entitlement reviews and capital allowances contract advice in relation to your purchase. We will undertake our due diligence and determine any steps that need to be taken pre-completion, but without causing any delays to the transaction.
For a free entitlement review – get in touch Cal@yes.tax
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