When buying a commercial property it is a common misconception that the purchase of the building does not qualify for tax relief in the form of capital allowances. However, embedded in the property, will be fixtures and integral features such as electrical installations, heating systems and plumbing which are qualifying assets for the purposes of capital allowances. These items can represent a significant proportion (up to 35%) of the cost of the building so can substantially reduce your tax bill.
To get the most out of your property purchase by way of capital allowances it is important to start thinking about capital allowances from the beginning of the conveyancing process so that a fixed value can be agreed upon sale. Before agreeing the contract, you must be satisfied that the seller has identified all eligible expenditure embedded in the property and has made a claim for capital allowances in respect of this already.
Fixed Value Requirement
It is now a statutory requirement that, if the purchaser is to secure tax relief in respect of any eligible items within the building that have been the subject of a capital allowances claim by the seller, the seller and purchaser must agree the value attributable to fixtures in the sale documentation and fix that value by way of a formal election within two years of the date of sale. The election will provide certainty for both parties of the capital allowance consequences of the transaction. Should this not be agreed, the buyer would not be able to claim the capital allowances without making a formal application for the apportionment to be determined by the First Tier Tax Tribunal (a costly exercise). This requirement also means that the true capital allowance history of the property being disposed of needs to be established to enable the agreement to be reached and election documentation to be prepared. This exercise has historically often been overlooked in the sale process or given little significance.
Mandatory Pooling Requirement
A further measure was introduced from 1 April 2014, known as the “mandatory pooling requirement”. This represents a severe risk for unwary purchasers. Under these rules a purchaser of a second hand property will only be entitled to claim allowances on second hand fixtures within the building if the fixtures have been properly identified by the previous owner and recognised in their capital allowance computation. This only applies where the previous owner was entitled to make a claim and therefore would not apply to purchases from pension schemes and tax exempt charities. The significance of this is that if the previous owner has failed to make a claim for capital allowances, which is not an uncommon occurrence, the entitlement to those allowances will be lost for all future purchasers of the building.
By seeking the advice of a capital allowances specialist early in the negotiation process you can ensure that you take full advantage of the capital allowances available to you on the purchase of your commercial property.
If you are thinking of purchasing or selling a commercial property please email tax@streetsweb.co.uk fo further help and advice.
