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Markel Tax

11 May 2020

Capital Allowances on property purchases

The last few years have seen changes to legislation related to the claiming of capital allowances on fixtures on the purchase of a commercial property. As a result, there is a degree of confusion over when capital allowances can be claimed and what steps need to be put in place to be able to make such a claim.

When a party acquires a building, by definition, they acquire the fixtures attached to that building. These fixtures typically include lighting, air conditioning, heating, and lifts, among others. The question remains how to attribute a value to these fixtures so that the buyer has a purchase price on which they can claim plant and machinery allowances.

From April 2012, s 187A and s 187B CAA 2001 came into place, which establishes a fixed value requirement whereby the buyer and seller must agree and calculate a value within the property purchase price that is deemed to represent the value of fixtures.

April 2014 introduced further changes whereby the seller must have pooled any expenditure on historic fixtures on which they would have been entitled to claim allowances, even if they did not do so. The pooling must be made in an accounting period commencing on or before the date of cessation of ownership of the property. Alternatively, first-year allowances must have been claimed on this expenditure.

There are two things to note from these changes. The first is that the rule applies to fixtures on which the seller would have been eligible to claim allowances. Legislative changes in 2008 expanded the range of items upon which plant and machinery allowances could be claimed, meaning that a greater number of types of fixtures are eligible. This raises the prospect of the buyer being able to claim a higher value of allowances than the seller if the seller originally purchased the property prior to April 2008. The pooling requirement applies to those items that the seller would have been eligible to claim allowances on.

The second point to note is that the requirement does not apply if the seller is not eligible to claim plant and machinery allowances. Pension funds are one example of this.

The legislation states that the burden of proof rests on the buyer to show whether or not the fixed value requirement applies. Failure to do this would prevent the buyer from being able to claim allowances. The process usually takes place through a S 198 election. This needs to specify the amount fixed as the sale price for each fixture. The values need not be the market value but cannot exceed the amount accounted for previously for capital allowances purposes by the seller.

While the theoretical approach would be to attribute a value for each fixture, in practice a building could contain hundreds of fixtures and it would be impractical to require a value to be specified for each individual item. HMRC, therefore, allows similar assets to be grouped together. The election, however, can only ever be made for a single property. It cannot cover fixtures across multiple properties. A separate election would need to be made if there are multiple properties.

Once made, the election becomes irrevocable and binding between the parties to the transfer and HMRC. As a general rule this needs to be made and submitted to HMRC within two years of the date of sale. However, as the granting of the entitlement of the buyer to claim allowances relies on a degree of cooperation from the seller, it is advisable to put these measures in place prior to the sale being agreed.

Markel Tax can identify capital allowances arising on the purchase of a property, and also work with you and your client prior to the completion of the purchase to ensure the relevant terms are included in the purchase contract so as to maximise the available allowances.

For more information, contact Adam Ellerington or call 0333 920 5708.

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