Guest article: What are Capital Allowances?
David Harper (pictured left) is an associate director at CBRE who specifically advises on capital allowances matters in the North of England. He spends his time meeting clients and reviewing their expenditure to assess the potential tax relief whether they are purchasing/disposing, refurbishing or developing a property. David also advises on the best strategy when there is planned expenditure with a view to achieve the maximum amount of tax relief. During his career David has saved his clients tens of millions of pounds which he always tries to explain in the clearest way possible.
What are Capital allowances
Capital allowances reduce tax liability and with the exception of dwelling houses are available on all types of commercial property. They are the only form of commercial tax relief available which is realised by identifying expenditure on qualifying assets in any commercial property. If you are purchasing/disposing, refurbishing or developing a property then there are most likely significant tax savings available as long as the following 4 requirements are met:
- You are a UK taxpayer (non-tax paying entities can still find them extremely valuable explained below)
- You incur qualifying expenditure on plant and machinery
- You hold the qualifying interest in the land (for example freehold or leasehold)
- You use the plant and machinery in the course of your business / trading stock
The assets referred to as “qualifying assets” are a wide-ranging list of plant and machinery and mechanical and electrical installations all of which attract tax relief. Some examples of qualifying assets are fixtures and fittings, air conditioning, space heating, ventilation installations, hot and cold water installations and lighting and power to name but a few.
What is the benefit of capital allowances
|Activity||Total expenditure||Potential maximum amount qualifying for capital allowances||Total tax relief (@19% Main rate corporation tax)|
|Refurbishing/fitting out||Per £500,000||£475,000||£90,250|
It is important to stress that as long as you still own the asset you can go back to any point in time to claim the tax relief so well worth a conversation.
In particular when purchasing a building, it must be established that no claims on the qualifying assets have been made by the previous owners which may restrict a claim. The idea of this being that no asset can be claimed on twice as explained in a little more detail below.
Legislative requirements on purchasing/disposing of a property
Since the introduction of new rules in April 2014, legislation now states the vendor, in most circumstances, is now required to “pool” (Identify) the capital allowances amount in their relevant tax return when the property is disposed of. They must then agree the figure they wish to transfer to the purchaser in an irrevocable document called an election (normally a CAA2001 s.198 election).
Failure to comply with these legislative requirements now results in the permanent loss of CAs (even beyond the current tax payer) and a potential legal dispute after disposal of the asset. Clearly, this will result in an increased tax bill each year for the taxpayer, and will potentially affect the resale value of the property.
What we have seen happening in response to these new rules is that if the vendor does not know the quantum of capital allowances and does not want to delay completion of a potential sale (a report can take time to complete), then they can agree by way of contract clauses with the purchaser to either keep the allowances or pass them on at a value to be agreed after sale.
By far the most crucial point here is there has to be clauses in the contract which state the agreement relevant to the situation. CBRE can provide these clauses or advice in general to save any tax relief being lost.
Who CBRE work with
- Tax paying entities – Our diverse mix of clients means we work with large and small property funds/companies, owner occupiers, non-resident UK landlords and long/short lease tenants.
- Non-tax paying entities – these include charities, pension funds, government bodies etc who, whilst not able to directly benefit from the tax relief, can still realise the value of them downstream where they can use them as leverage to a buyer.
- Student housing – Commercial elements of student housing qualify for capital allowances. Any common areas such as lifts, passageways and common rooms are all considered commercial areas so therefore qualify for tax relief.
- Currently loss-making entities – Companies that are not yet profitable can receive cash payments in lieu of tax relief on certain assets/activities such as LED lighting, AC systems and removal of contaminants (i.e. asbestos).
Get in touch
I would welcome a conversation with anyone who is currently or has historically incurred capital expenditure on a property to get in touch and see what the possibilities are. Generally speaking capital allowances are not well understood so we are here to help our clients gain the advantage and there are no fees or charges until you directly start saving money. Please feel free to call me on the below details or visit our webpage.
Telephone: 0161 233 5691