In April 2012, the Finance Act introduced new time restrictions for commercial property owners seeking to claim capital allowances, effectively creating the potential for billions of pounds of tax relief to be lost because of new deadlines. This potential loss can be attributed to a lack of awareness of the new time limits and to the complexity of the legislation making it difficult to understand the effects of these changes.
Capital allowances create tax relief on the purchase of a taxpayer’s fixed assets. For property owners, this means fixtures such as plant and machinery in a commercial property. A ‘value’ of these qualifying assets is created and that value is then written off against the taxable income of the business. Where a capital allowances claim has already been made by the previous owner, a buyer may only make a claim on the remaining balance of the same ‘value’ unless further qualifying expenditure is incurred. Due to their complex nature, capital allowances are often overlooked but can have a significant impact on the value of a property.
Prior to April this year, a property owner was entitled to claim such tax relief on qualifying assets at any point during their ownership, regardless of the date of acquisition or the date the qualifying expenditure was incurred. Under the new rules, HMRC now requires that the value of any qualifying fixtures must be agreed and recorded in a s.198 election (Capital Allowances Act 2001) within two years of a sale of the property if the buyer is to benefit. For the original owner of the property, the ‘value’ is based on how much the asset cost, disregarding any interest or finance costs. For the buyer, the value will be the figure agreed between the parties relating to the current worth of the assets in the property being sold.
Alexandra Savage, Commercial Property trainee solicitor for Hampshire based law firm Warner Goodman LLP, advises, “Buyers should consider capital allowances and agree a value with the seller prior to exchange of contracts. This avoids having to persuade a disinterested seller to agree after completion. If, however, the value of the assets is not agreed in the contractual negotiations, the buyer has two years to make a s.198 claim to the Tax Tribunal. This is important even if they do not wish to claim capital allowances as otherwise he will not be able to pass them on to a purchaser in the future, hence adversely affecting the property’s value.”
Prior to this new legislation, if no value was agreed between the buyer and seller, the buyer could make their own apportionment on a ‘just and reasonable’ basis, regardless of the value of the capital allowances previously claimed, therefore potentially doubling the tax relief claimed on the same assets. Alexandra concludes, “This proved onerous and costly for the HMRC to investigate, and so under the new legislation, where an election is made, the HMRC no longer has to spend time and money investigating the value assigned to qualifying assets as the ability to claim twice is now removed.”