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Markel Tax

12 Feb 2020

Structure and Buildings Allowance

Finance Act 2019 (s. 30) introduced a new Structural Buildings Allowance. Although this legislation has now been around for nearly 16 months (it was available from 29 October 2018), it remains an unfamiliar area.

The Capital Allowances Act 2001 did not give any provision for relief to be claimed on the vast majority of structures and buildings. The new scheme looks to provide for relief of construction costs of new qualifying buildings over their lifetime and thus address this gap in the existing system by offering greater scope for tax relief on construction costs. SBA has been introduced to relieve the costs of physically constructing the new buildings and structures, hopefully encouraging investment into the construction of new commercial structures and buildings, as well as the improvement of existing structures and buildings. SBA is available for non-residential structures and buildings; dwellings and land do not qualify for relief.

The allowance is a simple 2% deduction per annum on a straight-line basis over a 50-year period. Relief is available on eligible construction costs incurred on or after 29 October 2018. For a project to be eligible, the contracts for construction need to be have been entered into on or after this date. The relief is available to businesses paying either corporation tax or income tax. The relief rate is not linked to any subsequent increase in the value of the building becoming apparent in a sale or otherwise, and concerns only the original construction costs.

Qualifying Expenditure
The relief is limited to the costs of constructing the structure or building, including the costs of any demolition or land renovations required for the construction. Expenditure on land itself, including stamp duty, legal costs, or planning permission, does not qualify for the relief. If a building or structure is acquired from a developer, then an apportionment must be made to separate the cost of the building or structure from the cost of the land; the eligible costs will then be the overall acquisition price minus the cost of the land.

Structural and Buildings Allowances is limited to the original costs of construction or renovation, and is relieved across a 50-year period, irrespective of any changes in ownership. If the building is subsequently sold, the purchaser will take over the remainder of the allowance for the remainder of the 50-year period.

For a structure or building to qualify for relief, all contracts for the physical construction works, including any contracts for preparatory works, such as land alterations, must be made in writing and be entered into (signed and dated by the bound parties) on or after 29 October 2018. These requirements apply to contracts only, and do not include letters of intent. In most cases, if a written contract for preparatory work on a piece of land has been entered before 29 October 2018 with the intention to build on that land, the eventual structure or building will not qualify for the allowance. However, in some cases, the preparatory work will be unconnected to the eventual building or structure. For example, if an existing building is demolished (a type of preparatory work), but no new structure or building has been planned for that site at the time, this preparatory work is deemed unconnected to any future contract that is entered into regarding any new building or structure. So, as long as any new construction contracts for an eventual structure or building at that site are entered into on or after 29 October 2019, the new structure or building may be eligible for the relief.

Where a structure or building is being constructed for a qualifying activity (i.e. a commercial use) that has not yet commenced, any expenditure incurred more than seven years before the qualifying activity commences will not qualify for relief. A claim can only be made once the qualifying activity has commenced.

Disuse of a Structure or Building
If a building or structure ceases to be used for a qualifying activity, the allowance can still be claimed for a period of up to two years, after which no further relief can be claimed until the qualifying activity resumes. If relief is not claimed, it will not be carried forward to a further period, and will instead be lost.

Where a building or structure is damaged and can no longer be used for a qualifying activity, the allowances will still remain available for a two-year period to allow time for reconstruction. If reconstruction takes longer than two years, the allowances will not be available until the qualifying activity resumes. However, if the damage causes the structure or building to substantially no longer exist, the two-year period may extended up to five years.

Any new expenditure on reconstruction may qualify for the relief in its own right, also at a rate of 2% over a 50-year period. The total eligible costs of renovation will be the net of any costs covered by compensation or insurance.

If a building or structure is demolished, and the owner decides not to replace the building, they can continue to claim the Structural and Buildings Allowance on that asset for the remainder of the 50-year period.

Example

Company A builds a new commercial building where the construction costs were £20m. The company can claim SBA at a rate of:

£30m x 2% = £600,000 per year, for a 50-year period.

20 years after construction, a fire damages the property. The cost of rebuilding will be £10m, however the building was partially insured, and the insurance payments will cover £6m.

If the company chooses to rebuild, then it can continue to claim the £600,000 SBA for the remaining 35 years for the original building. It may also be able to claim SBA on the costs of reconstruction (after taking into account the insurance receipts) at a rate of:

£4m x 2% = £80,000 per year for a 50-year period.

If the company chooses not to rebuild, it may still continue to receive a “shadow SBA” on the original construction costs.

For a structure or building that is leased, more complex rules may apply as to whether the lessor or lessee may be eligible to claim the allowance. If SBA is claimed, then for chargeable gains purposes, a person’s allowable cost of the asset will be reduced by the amount of relief claimed.

If you require further information on this new allowance or wish to discuss your current position to gauge whether a claim is eligible, please contact Adam Ellerington on 0114 236 4457.

Next article in series

12 Feb 2020

Non-UK resident companies carrying on UK property business

The rental profits of UK property businesses generated by non-UK resident companies currently fall within the UK Income tax (IT) regime, with profits charged at a rate of 20%. However, from 6 April 2020, such profits will fall within the UK Corporation Tax (CT) regime, which is currently charged at a rate of 19%.