Tax Director, Matt Jeffery, shares case examples of how things almost went wrong!
Capital Allowances can provide valuable tax savings on the purchase of commercial property. However, the tax relief is often overlooked or misunderstood by owners and their advisors on commercial property transactions.
If the capital allowances position is not dealt with correctly in the sale contract, significant tax savings will be lost forever.
Since the new fixtures legislation came into force in 2014, more emphasis is being placed on commercial property solicitors to ensure the capital allowances position is dealt with correctly in the sale contract. The challenge faced by solicitors is the reliance on the client and their accountants to determine the capital allowances position. Resulting in claims being missed or transacted incorrectly.
Solicitors are not tax specialists nor, are they expected to give tax advice. However, if a claim is missed or transacted incorrectly, they could face litigation and lose a client!
If Capital Allowances are ignored, this can have serious consequences for both the Vendor and the Purchaser. In this article, we look at some case examples of when things nearly went wrong!
CASE 1: CALL CENTRE IN PEMBROKE DOCK
Commercial property sitting on £58,000 in unclaimed tax savings for over 18 years!
If you are acting for the Purchaser, the most important advice we can offer is to challenge the Vendors responses to CPSE’s when they insist no capital allowances are available. Why? Because property owners could miss out on thousands of pounds in tax relief. This is what nearly happened to a Call Centre business based in Pembroke Dock.
Zeal was introduced to the purchaser of this property during the conveyancing process. The clients’ solicitors had advised that no capital allowances were available. The reasoning was that “the property is over 18 years old”!
To be sure, Zeal carried out its own due diligence and identified that no claim had previously been made on the property and there were significant capital allowances available.
Zeal was able to help the Purchaser negotiate that the capital allowances being passed to them by the Vendor. Zeal provided the contract clauses to bind both parties to the agreement post completion. The claim was completed within 2 weeks of the sale.
The Call Centre business received £58,000 in corporation tax savings.
CASE 2: BELLINGHAM HOTEL IN WIGAN
Misunderstanding the rules could have potentially led to the loss of a £22,000 tax repayment!
It was identified during the conveyancing process that the Vendor had not claimed capital allowances on the building. The Vendors’ accountants had completed the capital allowances section of the CPSE incorrectly. The answers supplied to the questions were in relation to loose fixtures & fittings, rather than the embedded fixtures, which is a common misunderstanding by professional advisors.
Zeal assisted the Vendor to identify and secure capital allowances prior to sale. The claim generated an immediate cash tax repayment of £22,000 and a pool of capital allowances worth over £18,000 were retained to use against income from other property lets.
Accountants often confuse capital allowances on embedded fixtures within buildings (e.g. electrical, heating and ventilation systems etc) with loose fixtures & fittings like furniture and equipment. The main reason claims are not made, is that it requires the skills of quantity surveying to assess the qualifying expenditure. This is outside the remit of accountants and leaves a wealth of unclaimed tax relief.
Had Zeal not been involved in this transaction the property would have been sold and the capital allowances would have been lost forever.
The owner of Bellingham Hotel received an immediate cash repayment of £22,000.
CASE 3: CROOK LODGE GUEST HOUSE IN YORK
Incorrect and invalid S198 meant both buyer and seller nearly losing thousands!
The new owners were contacted by Zeal post sale. The owners were familiar with capital allowances as they previously owned a doctor’s surgery that had made a claim. They informed as that they had been told that no claim could be made due to a s198 election for £1.
On further investigation, Zeal found that the s198 was incorrectly inserted into the contract. The Vendor had never made a claim on embedded fixtures. Fortunately, the s198 election was never signed or even submitted to HMRC. Nevertheless, it was still within the 2-year time limit to amend it if it was submitted to HMRC.
Zeal engaged with the Vendor and Purchaser who agreed to share the benefit of the capital allowances. Both parties received cash repayments of tax in excess of £15,000.
Some of the capital allowances rules are complex and failure to comply will often lead to losses for the client. By having an idea of the issues involved and knowing what questions to ask, you can often save your clients significant amounts of money.
The cost of overlooking this aspect can be considerable – to both Vendor and Buyer. This was the almost the case for Crook Lodge Guest House.
Both vendor and purchaser received cash repayments of £15,000.
Ensure your client does not miss a claim for Capital Allowances!
Capital allowances should never be just a tick in a box. If you are a solicitor involved in commercial property transactions for your clients, then you have a legal responsibility to discuss the issue of capital allowances with your client and the potential tax relief locked in their property.
Not raising the issue could lead to an unhappy client that finds out later how much tax relief they missed out on. Simply ticking a box doesn’t meet the legal requirements to prevent a client from suing for professional negligence.
On the bright side, the solution is simple. Engaging a capital allowances specialist early on to support both you and your client will ensure your firm remains compliant. It also results in happy clients and usually a nice referral fee from your appointed tax consultant.
At Zeal, all we need is a few simple details about your client and their property and we do all the rest. Plus, we do not charge any fixed or upfront fees, so there is no risk to your client in having a conversation with our team to find out if there might be tax relief hidden in the property being bought or sold.
If you want to know more about these case examples or how capital allowances affect property transactions, Zeal is running an on-demand webinar specifically for Solicitors. Register now to join one of our upcoming sessions.
If you would like to discuss working with Zeal to help your clients with capital allowances or have any specific questions, please contact our Tax Partner Matt Jeffery on 01633 386017 or email email@example.com.
Disclaimer: At the time of writing (26 October 2023), reasonable care has been taken to ensure that the information contained in this article is accurate. However, no warranty or representation is given that the information is complete or free from errors or inaccuracies. Generic information is contained within this article and each individual’s tax affairs are different, further advice should be sought from a specialist advisor, such as Zeal Tax.
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