Since the capital allowance rules had their last major change in April 2014, many commercial property transactions are being held up due to last minute negotiations and care should be taken to ensure tax relief is not permanently lost. Capital allowance elections are now the norm on any commercial property sale.
Let me re-cap on the type of expenditure relevant here. Tax relief is available on the cost of fixtures within a building such as lighting, electrics, heating, air conditioning, fitted kitchens and bathrooms. For properties such as hotels or nursing homes, which have high fit-out costs, the qualifying level of spend could be 25%-40% of the total building cost. Even a landlord’s shell can have 10%-15% of qualifying spend. Are you sure you have claimed allowances for these items on purchase or on refurbishment?
The new rules have thrown a spanner in the works and it is extremely unwise to ignore this until after the transaction – once the sale has gone through there may be little motivation for the seller to sort it out and it also puts the purchaser in a very weak bargaining position. The capital allowances position on a property transaction now needs to form part of the commercial negotiation of any deal. There is a two year time limit to ensure elections have been agreed and filed to ensure there is no permanent loss of allowances.
There may be other opportunities arising – for example when buying from a pension fund or charity (where they could not claim allowances) or on the cold water and general electric fittings on a purchase as the seller may not have been able to make a claim on these. These areas are particularly valuable as the claim is based on current replacement cost which can be significant.
The government is reviewing the effectiveness of capital allowances and considering options for reforming the regime in future. There is no guarantee that this tax relief in its current form will remain available going forward so it would be worthwhile to capitalise on any opportunities now. If you are paying tax then it makes sense to review your existing portfolio and also to review any potential transactions for opportunities for saving income or corporation tax.