Property investment and Capital Allowances changes - Business Works
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Property investment and Capital Allowances changes

by Graham Burrell, Head of Capital Allowances, CBRE Currently there is no time limit during which capital allowances can be claimed on the acquisition of a property, but this will change next month, after which just two years are available in which to pool any qualifying expenditure, says Graham Burrell, Head of Capital Allowances at CBRE.

If a property is purchased after 1 April 2014 (for corporation tax payers) or 6 April (for income tax payers), capital allowances must have been be pooled (either by the seller, or by the seller and the vendor electing to transfer the allowances at an agreed amount). If this is not done, the potential tax relief on this and all future transactions on the property may be lost.

Here is an explanation in Q&A format to help understanding:

1. What are Capital Allowances?
A form of statutory tax relief available for capital expenditure incurred on certain assets; they enable any entity paying UK tax to write off relevant expenditure against taxable profits and income, resulting in a substantial increase in post-tax profits and income.

2. Can anyone claim them?
Capital allowances are available to all entities (investors and occupiers) liable for UK tax; including:

  • UK based companies and individuals investing in assets at home or abroad; and
  • Offshore or foreign companies and individuals investing in the UK.

3. Why are pension funds exempt from being able to claim?
Pension funds are typically exempt from claiming capital allowances because they are non-taxpaying entities.

4. What is changing in April 2014?
Currently there is 'no' time limit for claiming capital allowances on the acquisition of a second-hand property. We just have to research the tax history back to 24 July 1996, to satisfy HMRC that there has been no prior claim made by a previous owner.

In April 2014 this will change and there will only be a 2 year window in which to claim allowances. Therefore, any transactions which happen from April 2014 will have to pool their capital allowances within 2 years, or the potential tax relief on the property will be gone forever.

Although Capital Allowances is quite high on the pecking order of priorities when acquiring commercial properties, their importance should ascend to arguably the most urgent, due to these changes, that will be introduced into the capital allowances legislation from April 2014.

In summary, the effect of the changes will mean that a purchaser will only be entitled to claim capital allowances on the acquisition of a property where:

  • The seller (or if the seller is not within the charge of UK tax, the most recent owner who is) having 'pooled' the capital allowances before sale on all his fixtures existing in the property, and
  • The seller (if within the charge of UK tax) and purchaser enter into either a section 198/199 election within two years of the sale to agree the value of the allowances taken on board by the purchaser, or if agreement cannot be reached, both parties refer the matter to a tribunal.
If the above measures are not undertaken, a purchaser will be denied the opportunity to claim capital allowances on the acquisition price. What's more, all subsequent owners of the property would also be denied capital allowances on those fixtures, which is a radical departure from current long standing capital allowances practice.

In other words, if I was to buy a property in April 2014 for £100m, where the allowances would be circa £30m, and I do not make a claim within the two year window. The £30m is lost forever!!

Presently, a purchaser's entitlement to capital allowances is not dependent on the seller having pooled the capital allowances. In fact, it is to the purchaser's advantage where the seller has not pooled or claimed the capital allowances.

Clearly, a bizarre consequence of the revised legislation will be that a purchaser may have to ask the seller, as part of the sale negotiations, to pool the capital allowances. This would mean that the seller would have to undertake their own capital allowances research and a full analysis of their acquisition price and / or construction costs to quantify the allowances prior to sale.

With such radical changes, we are now beginning to see evidence of non-tax paying investors such as pension funds adopting an increasingly proactive approach to capital allowances on property acquisitions, in the event that they go on to sell their assets.

5. Why are the changes taking place?
Researching the tax history on property transactions can be both time consuming and an administrative nightmare, particularly when companies go into administration and cease to exist. HMRC are therefore often faced with claims being submitted twice for the same property.

I don't believe HMRC have a recognised system for tracing claims on properties, so these changes should make it simpler for them to keep a track on what relief is being given.

6. How much can I save by putting in a Capital Allowances claim before April 2014?
Not applicable. It is more about companies getting their house in order for when they come to dispose of assets post April 2014.

7. How will this affect me as a property owner / manager?
For purchasers, the changes are of such magnitude that failure to have comprehensively addressed capital allowances and undertaken appropriate action in the lead up to exchange of contracts, is likely to result in no capital allowances becoming available on the acquisition price.

Transactions and issues which will not be affected by the revised legislation:

  • The grant of a leasehold interest for a capital sum - where the right to the allowances is not passed to the lessee
  • The entitlement of purchasers who acquired prior to April 2012 and who continue to own the property
  • Capital allowances relating to capital contributions
  • Purchase of an SPV (although the SPV itself may come under the revised legislation)
  • The purchase of a new unused property from a developer trader
  • Pension fund purchasing a property from a pension fund where no prior qualifying owner had owned it
  • The entitlement of purchasers who acquire a property from a pension fund where no prior qualifying owner had owned it
  • The entitlement of a purchaser to claim integral features on a property, where the seller or a prior owner was not entitled to claim integral features
  • Sellers of properties 'rich' in fixtures, who are chargeable to UK tax and who have not pooled the allowances because there was insufficient income. Clearly there is a deal to be done here with the purchaser
  • Sellers who are not chargeable to tax such as pension funds where there have been no prior owners, because the property will typically be more attractive to purchasers compared to a similar property being sold by a seller who is within the charge of tax.
  • The losers will be purchasers of properties from April 2014 onwards where the most recent qualifying owner back to April 2012 has not pooled the allowances.

8. How will this affect me when selling a property?
If you are a Pension Fund then your property could become much more attractive to a buyer than if say he was purchasing from a tax paying entity.

If you are a tax paying entity then you will also need to make sure that you have pooled the allowances within the two year window. Failure to do so will mean that any future purchaser will not be able to make a claim. This could affect the market value of the property in certain investor's eyes!

9. How is this likely to change the property market more generally?
We expect to see more focus on capital allowances prior to transactions taking place and it could begin to affect the market value or appeal of some properties going forward.

10. Should details about Capital Allowances claims be included in vendorís packs?
Yes. We always suggest to our clients that CAs are included within a vendor pack as this provides any future purchaser with an informed view on what will typically be available.

This can assist with the sales negotiations and in some cases increase the sale price. If nothing else, it might make the deal seem more appealing to a tax paying entity that is carrying huge trading profits.

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