The ‘integral feature’ uplift in property purchases
Updated: Jul 5, 2020
If you buy a property from someone who owned it before 2008 there is a chance you will be entitled to claim what is sometimes referred to as the ‘integral feature‘ uplift.
For the right property with past owner the benefits can be significant, with up to 5% of additional allowances available. However, not every deal will attract the additional allowances and there are lots of traps in claiming the uplift and more details are set out below to explain the background and focus areas.
Background to integral features
In Finance Act 2007 the government introduced the term ‘integral features’ to define the following types of fixed plant and machinery in buildings or structures: –
lifts, escalators and moving walkways
space and water heating systems
air-conditioning and air cooling systems
hot and cold-water systems (but not toilet and kitchen facilities)
electrical systems, including lighting systems
external solar shading
The purpose of the change was
To give greater certainty to taxpayers and their advisors on what qualified for plant and machinery allowances (PMAs)
To protect HM Treasury and help support the funding of headline corporate tax rate reductions (integral features attract a slower rate of tax relief than other plant or machinery).
Items that qualify for uplift
The ‘integral feature’ uplift is only available to items that the seller (and owner at April 2008) was not entitled to claim.
An important feature of the above change was that all the assets contained in (4) to (5) now qualified for PMAs regardless of their use in the trade involved – the other assets generally qualified when the basic entitlement criteria were met.
The issue with (4) and (5) was that main services and systems for cold-water and electricity were specifically excluded by statute and before April 2008, any business that wished to claim on these items had to demonstrate a robust basis to support any claim.
Some were able to claim substantially more than others (e.g. hospitality, leisure, healthcare, manufacturing) but most would make claims on a piecemeal basis. This created complication and lots of inconsistencies in treatment.
It is the parts of these non-qualifying general cold water and electrical systems (mains, power and lighting etc.) that have the potential to be included in an ‘integral feature’ claim.
Interaction with other allowances
Just because an ‘integral feature’ was ineligible for PMAs before April 2008, it does not mean that the past owner might not have been entitled to claim another allowance (e.g. hotel allowances, industrial building allowances, business premises renovation allowances or research & development allowances).
If such a claim was made an additional set of rules exist to protect HM Treasury and reduce any ‘integral feature’ uplift for the affected qualifying items involved.
Interaction with ‘mandatory pooling’
If you buy a property from a tax paying business after 2014 you will only be entitled to claim PMAs on items that the seller has claimed (‘the mandatory pooling requirement’) and there are procedures to agree a transfer value (election or Tribunal).
If the seller held the property before April 2008 they may not have been entitled to claim on some of the ‘integral features’ in (4) and (5) above. This brings these items outside the mandatory pooling requirement and subsequent restrictions.
Interaction with other anti-avoidance
As you would expect, there are also additional anti-avoidance rules which any ‘integral feature’ claim will be subject to. These includes transactions between connected parties and sale or lease and leaseback transactions.
The former can remove any entitlement to an additional claim entirely and the latter can restrict it to the lower of original cost and market value for the qualifying items involved.
The claim processes
Integral feature claims will generally be calculated using a just and reasonable apportionment that is referenced to the approved valuation office (VOA) formula. The Courts take a dim view of claims that aren’t calculated correctly and HM Revenue & Customs (HMRC) are entitled to reject them out of hand.
Before doing any calculations, you must:
Ensure that the assets installed in 2008 are still within the property (i.e. no substantial upgrade or tenant alteration)
Confirm the entitlement position of the Seller and basis of any claims made (including details of qualifying expenditure).
At Furasta, we have significant experience of preparing VOA and HMRC compliant valuations and if you would like more details we would be delighted to hear from you and can be contacted here.