A Sledge Hammer Approach

Alun Oliver and Rupert Guppy set out the complex current capital allowances regime and issues affecting real estate transactions.

Sledgehammer

Life has become more challenging since April 2014 and the introduction on of the complex new fixtures rules (NFRs) governing the availability of capital allowances on the purchase of ‘second-hand’ buildings.

FA 2012 s 43 and Sch 10 introduced ss 187A and 187B into the Capital Allowances Act 2001 (CAA 2001) was the basis of these new convoluted requirements. We are now starting to see increasingly antagonistic attitudes, with some vendors wanting financial compensation on for cooperating with NFRs.

In addition, those who have lost out and subsequently found their capital allowances to be nil are now turning to litigation to recover the ‘tax savings lost’. The transaction due diligence and conveyancing puts solicitors, tax advisers and surveyors in ‘pole position’ to face PII claims if these matters have not been adequately addressed.

Purchase Claims

Capital allowances are potentially available on all commercial property transactions. They generally equate to between 10% and 45% of the purchase price of a commercial property, depending on its design specification and its intended use.

Hotels and hi-tech data centres or telecoms facilities typically yield capital allowances claims at the upper end of this range; while retail or industrial premises are normally towards the lower end, depending on the precise use – remembering that any tenant’s fit-out expenditure is outside the scope of a landlord’s claim.

However, tenants can claim capital allowances for their own costs – an important point that is not universally recognised, judging by the number of tenants and accountants we see ignoring these, wrongly presuming they are applicable only if they own the freehold interest.

Key Points

What is the issue?

There is a steady trend by clients to litigate against poor tax advice. The capital allowances rules remain complex and convoluted, especially CAA 2001 s 187A on second-hand property purchases, which changed in April 2014 and had a two-year window for action. Since April 2016 this window has had an impact on past transactions and potentially denies tax relief to purchasers and future owners.

What does it mean for me?

As an adviser to property investors or owners, failure to understand these complex capital allowances rules could create serious risk of a PII claim against tax relief lost by clients not benefiting from optimised capital allowances claims.

What can I take away?

This is a complex area of property tax and CPSEs now recommend early involvement to understand and protect the tax position.

 

This article was published in Tax Advisor Magazine in September 2016.

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