Structuring Capital Projects - Don’t Lose Your Capital Allowances
Here at YesTax we pride ourselves on creating detailed and comprehensive reports in relation to clients’ property purchases, constructions, refurbishments, fit-outs and all manner of improvements.
However, the value we can add is not limited to the detailed analysis and reports. Our specialist team provides up front advice on the structure of capital projects, timing implications for project planning, as well as reviewing and advising on purchase and development contracts, to ensure entitlement to claim capital allowances is not lost.
When planning a large capital project or purchase, there are many important commercial factors that will be considered when deciding where the property is held and where expenditure is incurred, between different group entities, individuals or members of a partnership. Provided below is the information you’ll need to ensure you maintain your entitlement to claim capital allowances:
The General Rule
Broadly for capital allowances to be claimed, 3 conditions should be considered:
- The entity must have a legal interest in the land/assets in question
- The entity must have incurred the expenditure
- The entity must have a qualifying activity that the assets will be used for
Legal Interest
For a property this will usually mean freehold ownership but can also include
- A lease
- A licence to occupy land
- An easement or servitude
- An agreement to acquire a freehold/leasehold interest, easement, or servitude
This might sound simple but issues can occur where one entity is operating the property as part of their trade, and another entity owns the property.
This is commonly seen in groups of companies in a “PropCo” & “OpCo” structure. In these cases, it is vital to put something, typically a lease, in place between the two entities, to prevent the allowances being lost between the entities.
Who’s Incurred the Expenditure?
This could certainly be considered a straightforward condition the majority of the time. However, complications may arise where one party is incurring expenditure on another’s behalf either through some from of contribution (mostly seen in landlord/tenant relationships), receipt of a grant, or through an intragroup recharge.
Where multiple parties are involved in a development, be sure to consider whether the entity with the interest and activity is incurring the spend, and if it’s not clear cut, seek advice.
Qualifying Activity
This is the activity that the building is used for, for the entity making the claim. The trade being operated from the premises, or letting out properties as part of a UK property business.
Consider a warehouse owned by a landlord, and leased to a tenant logistics company – who gets the allowances? They will each be entitled to their own allowances on expenditure they incur.
The landlord can claim on their expenditure on landlord assets such as lighting, power, domestic water, or security, on the basis they own the property and have a leasing activity.
The tenant has a logistics activity and a leasehold interest, and can claim on any expenditure they incur at the property, for example on racking or equipment.
What to Watch Out For
These conditions may seem like common sense but in some cases, they can result in the allowances being lost in no mans land between entities. Watch out for the following flags:
- PropCo & OpCo structures without a lease in place
- Intra-group recharges of capital spend
- Properties owned by individuals outside the company
- Informal arrangements to use property
- Partnerships where an asset is owned by a partner individually (additional rules apply for partnerships)
- Capital projects where a contribution or grant will be received (the contracts will need to be reviewed)
In such situations, wherever an entitlement issue arises, it’s rare that it can’t be fixed with the right advice, even retrospectively. We’d be delighted to help and so please don’t hesitate to get in touch for a free consultation should you need any help with your capital projects and property purchases.
If you have any queries on any capital allowance matters, then please do get in touch with YesTax's Head of Capital Allowances, Cal Byers - cal@yes.tax
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