Can you claim capital allowances on property purchases?
Updated: Jul 5, 2020
That’s the reality attached to most property sales and before doing anything a reputable advisor will ask for more details. Ideally your entitlement position will be clearly established at the point of purchase but in practise this is not always carried out.
If your property was bought from a developer, charity, pension fund, or local authority there is a good chance you will be entitled to claim fixed plant and machinery allowances on a proportion of the purchase price paid (in addition to the cost of moveable plant or equipment which is usually allocated separately for stamp duty and land building transaction tax purposes) and depending on the use, specification and location of the property this could be as much as 40% (i.e. an overall potential tax saving over time of between £7.60 and £18 for every £100 spent under current corporation and higher income tax rates).
Well done, you’re almost past the first hurdle, but if the seller acquired the property from another person (ie. they were not responsible for its construction) an additional set of checks are required which in theory could go back to 24 July 1996 to determine the first owner entitled to claim. In such scenarios, a restriction is likely.
To prevent allowances being given more than once the rules were substantially tightened in the Finance Act 2012. The first restriction which came into force in April 2012 was to ensure that when a seller had claimed plant & machinery allowances the buyer obtained a valid capital allowances election setting out the value of allowances included in the sale. At the same time Tribunal proceedings were introduced to encourage a fairer allocation between the parties involved with either being able to refer for independent assessment. No election meant no future claim on the items previously claimed by the seller.
The second restriction came into effect in April 2014 and was designed to encourage businesses to claim allowances when entitled to; if they didn’t and subsequently sold the property, any buyer would be restricted to nil. This provision was known as the ‘mandatory pooling’ requirement and means that if you now buy a property from a tax paying business who was entitled to claim and for whatever reason chose not to, you and any future owner, will be restricted to nil.
To what extent this affects the commercial reality of the deal will be dependent on the age, type of property and circumstances of the parties involved. A relatively new office, hotel or nursing home will have significantly more allowances inherent in it than an old retail warehouse. Allowances are more valuable to higher earners compared to compared to companies.
A willing seller could submit a claim in the period of sale such that an election can be entered into and the benefits passed on to the new buyer and this is becoming increasingly common in practise. Doing so involves the same procedures, checking that they hold a legitimate entitlement to claim (they seller could be a purchaser and/or constructor) and the existence of works carried out by third parties (eg. tenant installed items).
There may be legitimate reasons why an election or retrospective claim may not be appropriate or possible for all the plant or machinery included in the sale; for example, where the seller has claimed industrial/hotel building allowances; agricultural building allowances; research & development allowances; business premise renovation allowances or held the property before 31 March 2008. In such cases there could be hidden upside and risks if not investigated properly.
If a claim is available on a property purchase outside the election agreement a capital allowances valuation will be required to identify the constituent parts of the transaction (ie. land, buildings and plant or machinery). This is a specialist area of tax valuation with a Valuation Office Agency (VOA) governed methodology and should only ever be carried out by an experienced capital allowances specialist. The Courts have a track record of challenging improper valuations and Inspectors of Taxes are instructed to refer claims to the VOA for approval.
There are additional restrictions for sales between connected parties, sale/lease & leaseback and properties used for residential lettings (including student accommodation). Properties (including parts of properties) acquired for providing a facility to conduct R&D for your own trade may qualify for a 100% allowance. As ever it is recommended that the appropriate specialist advice is taken.
If you would like more details please do not hesitate to get in touch here.