The Good, the Bad and the Ugly

Alun Oliver and Rupert Guppy highlight the new capital allowances rules for property transactions from 1 April 2014.

Taxation Article 2014

The most significant changes to capital allowances since July 1996 were introduced from 1 April 2014. Contrary to the views of some doom-mongers, the good news is that taxpayers will continue to benefit from claiming capital allowances where they incur capital expenditure on an existing property.

CAA 2001 entitles a purchaser to claim tax relief in respect of the proportion of the expenditure that relates to eligible assets – known collectively as fixed “plant and machinery”.

Capital allowances give tax relief for property owners, occupiers and investors. There are several types of allowances, applicable to different asset categories. The principal forms, found in all commercial properties are:

  • „„plant and machinery; and
  • „„integral features.

There are also capital allowances for:

  • short-life assets;
  • „„long-life assets; and
  • „„energy-efficient and water-saving assets.

Since 2011, when industrial buildings allowances (IBAs) were abolished, there has been no tax relief available on the raw building or structural components of the property: the floors, walls, roof etc.

KEY POINTS

  • „„Capital allowances will continue to be available on second-hand property.
  • „„Optimising capital allowances improves cash flow.„„The fixed-value, pooling and disposal value requirements.
  • „„Failure to comply with the new rules can mean that qualifying expenditure is nil.
  • „„Property owners and advisers should review investment properties held without claiming capital allowances.

 

Plant and machinery is allocated to the “main pool” and attracts writing down allowances (WDA) at 18% a year on a reducing balance basis. The “special rate pool” is for integral features and thermal insulation added to existing buildings, which attract WDAs at 8% a year – also on reducing balance basis.

Capital allowances are not given automatically, other than for real estate investment trusts (REITs) where they are deemed to have been claimed. Consequently, the taxpayer must claim the annual WDAs within their tax computation to reduce their taxable profits and ultimately the tax due. The optimisation of the available capital allowances in a building is a key factor for successful property investors and also improves a business’s cash flow.

All too often, capital allowances are left unclaimed for several years. The reasons for this include: lack of awareness (by clients and their advisers); that they are seen as of little value; perceived as risky or too complicated; and a common misconception that claiming reduces the capital gains tax base cost – potentially creating future issues – which is not the case, where properties are sold on for a profit.

Although the tax legislation – the first to benefit from HMRC’s “tax law rewrite” simplification project – is far from simple, good and timely advice can yield significant tax savings or avoid costly mistakes. 

New Fixtures Rules

The bad news on current capital allowances rules came with the new fixtures rules. The tax legislation relating to fixtures within buildings was amended by FA 2012, Sch 10. This is badly drafted legislation caused by protracted consultations and ultimately HMRC’s desire to stop the increase of capital allowances as properties appreciate in value. Instead of an overt and simple cap on original costs, or fixing the costs at the first purchase after the rules came into effect, the legislative draftsmen came up with CAA 2001, s 187A and s 187B and created three new requirements: 

  • „„a “fixed-value requirement”;
  • „„a “pooling requirement”; and
  • „„a “disposal value statement requirement”.

The fixed-value requirement is that the part of the price apportioned to fixtures in the building must be fixed either by:

  • the seller and buyer agreeing and entering into an election under CAA 2001, s 198 at the time of the purchase or within two years; or
  • „„applying for a determination by the First-tier Tribunal within two years of the purchase.

The pooling requirement only affects transactions since 1 April 2014, and stipulates that the seller should have “pooled” expenditure on fixtures before a property is sold. The seller should either:

  • make a claim for capital allowances; or
  • „„notify HMRC of the amount of their qualifying expenditure and add it to their pool without making any claim.

Final warning

The failure of tax advisers, lawyers or surveyors to highlight the importance of these “requirements” and their impact on capital allowances or to address these matters early enough at the appropriate time will, in our view, lead to significant increases in litigation for negligent advice.

Those taxpayers (and senor accounting officers) who take the time to get organised, putting in place systems to retain the relevant records of their properties, will continue to enjoy capital allowances tax savings. They will also ensure that the capital allowances are either retained by them, through using the s 198 election mechanism, or are passed on safely to a new purchaser by having been pooled and so not “wiped out” to nil by s 187A(3).

 This article was published in Taxation in April 2014.

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