Why legal professionals should seek specialist advice when dealing with capital allowances on commercial property transactions.
Chronical Law interview Matt Jeffery, Zeal Tax on how changes to the Finance Act in April 2014 has impacted commercial property transactions.
What are capital allowances?
Capital allowances provide tax relief for capital expenditure on ‘Plant & Machinery (“P&M”)’. Common examples include vehicles, IT equipment, furniture, machines etc. P&M also extends to ‘Embedded Fixtures’ that are acquired with or installed in a building used for business purposes.
Whilst accountants will claim capital allowances for their clients, the legislation for claiming capital allowances on embedded fixtures is complex and requires the skills of both capital allowances specialists and quantity surveyors. As a result, the tax relief is often overlooked or misunderstood by accountants, meaning owners of business properties are missing out on thousands of pounds of tax savings.
Why are they important on the sale or purchase of commercial property?
Changes to Finance Act 2012, which came into effect from 1 April 2014, mean that capital allowances claim’s on fixtures purchased with commercial buildings must be dealt with at the point of sale.
The ‘Pooling Requirement’ introduced from 1 April 2014, means that a Purchaser of a commercial building would need the Vendor to ‘Pool’ any unclaimed capital allowances and pass them on to the Purchaser by way of a capital allowances election (CAA2001 s198/s199). Without an election, the tax relief may be lost forever.
Given the significant value capital allowances claims on the purchase of commercial buildings generate, there has been increased pressures on commercial property conveyancers to ensure that capital allowances are addressed and dealt with correctly during a transaction. Failure to do so, can result in thousands of pounds in lost tax relief and potential litigation claims for conveyancers.
Who can claim capital allowances on commercial property?
The tax relief is available to UK resident individuals, partnerships, LLPs and companies. Non-UK residents can also claim capital allowances if the property is situated in the UK.
The tax relief can be claimed by trading businesses and property investors. Property developers/traders would not be eligible. Non-taxpaying tax entities such as pension funds, charities or councils are also not eligible to claim.
What buildings qualify for capital allowances claims?
All commercial buildings could potentially qualify or a capital allowances claim.
A residential property that is provides someone’s main residence would not qualify for a claim. However, a residential property acquired for business use would. This includes holiday lets, care facilities, children’s nurseries etc.
What items qualify for capital allowances?
The easiest way to explain what qualifies as an ‘embedded fixture’ is to imagine being able to pick up the building, turn it upside down and give it a good shake. The items that don’t fall out would qualify for tax relief. It’s things like the heating, electrical and water systems, air-conditioning, lifts, kitchens and bathrooms etc. A full list can be found on HMRC’s website – or you can watch our short animated video
How much tax relief is available on building purchases?
Capital allowances values differ depending on the type of commercial property, its location, construction, and fixtures within it. Typically, between 10% to 30% of the purchase price will qualify for capital allowances tax relief.
For a limited company, claiming capital allowances on a building purchase will reduce the overall cost of the property by 5% to 7%. For individuals, the saving can be up to 10%!
How are capital allowances determined?
To identify the capital allowances on the purchase of a building, a capital allowances valuation is required. A capital allowances specialist firm or quantity surveyors would carry out this valuation exercise.
Isn’t this something our clients’ accountants should be dealing with?
Responsibility for advising on capital allowances on a commercial property transaction rests with the Vendor and Purchaser’s accountants. The Vendors accountants will provide responses to the CPSE questions on capital allowances and the Purchaser’s accountants need to interpret these to determine the entitlement for their client.
In practice, the capital allowances position is often overlooked, misunderstood, or just avoided by both the Vendor and Purchasers accountants. The answers to CPSE questions are often incorrect or just deemed ‘not applicable’. This results in invalid capital allowances elections or no elections at all. Ultimately, in these cases, the Vendor or Purchaser will be missing out on valuable tax savings.
What should property lawyers be doing?
If you are acting for the Vendor, commercial property conveyancers should ensure that their clients have identified all capital allowances before sale and provide contract clauses and capital allowances elections in the contract that enable the Vendor to retain the tax benefit after sale.
If acting for the Purchaser, you should encourage them to review their capital allowances entitlement as early as possible in the contract negotiation stage. A contract clause and capital allowances election can then be included to ensure your client obtains the maximum possible benefit of capital allowances tax relief.
Whilst commercial property solicitors are not qualified nor engaged by their client to provide them with tax advice, they do have a responsibility to ensure any clauses, elections or warranties included within contracts are correct and legally binding. It is, therefore, vital they have an awareness of the capital allowances rules and the opportunities for their clients to save tax.
It would also be wise to have a capital allowances specialist like Zeal on hand to advise your clients! Zeal work with commercial property conveyancers to provide expert advice to them and their clients. This takes the risk away from solicitor practices and ensures their clients are not missing any tax relief.
How much is this likely to cost my client?
Zeal offers a free capital allowances due diligence service for Vendors or Purchasers. Our team will review a client’s entitlement to claim capital allowances and negotiate the position on their behalf.
If Zeal can secure capital allowances for a client, we would charge a success fee based on the value of the capital allowances claim.
Will dealing with capital allowances at the time of transaction delay the process?
The simple answer is no. Zeal can provide contract clauses that enable the capital allowances position to be finalised post sale, if necessary.
If you would like more information on capital allowances for commercial properties, you can access Zeal’s free CPD training session by contacting us on email@example.com.
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 firstname.lastname@example.org.
Disclaimer: At the time of writing (30 September 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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