Depreciation is not a deductible expense for tax purposes. Instead, the owners of qualifying commercial property can claim capital allowances as a method of providing tax relief on qualifying expenditure on certain assets (plant and machinery) used in a business.
Qualifying Commercial Property
Qualifying commercial property may include:
- care homes
- industrial units/warehouses
Capital Allowances can be claimed when buying or developing such freehold properties, constructing new properties or developing leasehold properties.
Broadly, qualifying expenditure can be defined as money spent by a business on acquiring or maintaining ‘plant and machinery’.
Plant and Machinery
Plant and machinery has no statutory definition, but can include fixtures and fittings as well as moveable items such as furniture. More integral fixtures can include carpets, air conditioning, sanitary ware, kitchens, heating, emergency lighting, wiring to fixed plant (such as a fire alarm), fire equipment, security systems and telecommunications. The list is extensive and applicability will depend entirely upon your particular situation – broadly, the asset must be used in the relevant business.
The importance when buying or selling commercial property
The issue of capital allowances is so important because if a seller of commercial property has been claiming capital allowances on the property in question, the seller and buyer must ascertain the amount of the sale proceeds to be apportioned to the relevant plant and machinery.
Of course, should a buyer seek to claim allowances in respect of the plant and machinery at the property after the transaction, it will need a figure on which to claim the allowances.
In this instance, it is essential that both parties consider this issue at a very early stage in order to prevent lengthy negotiations at a later date. A figure will need to be ascertained and the financial advisors of both the buyer and seller will need to be informed.
If the buyer is going to be able to claim allowances after the purchase, it is now compulsory that the parties enter into a S.198 Election. This is a simple statement appended to the contract of sale fixing the value of the plant and machinery.
It is usual for an election to be at either “tax written down value” or at £1 per pool of assets.
An election at ‘tax written down value’ means that the figure reflects the value of the assets in their depreciated state, as calculated by the seller’s financial advisor. The impact of this is that the seller will not suffer a “clawback” of any allowances already claimed. Having said that, the seller would no longer be able to claim any further allowances as the assets will have been fixed at their true value and the buyer will then step into the seller’s shoes and claim the allowances from that point onwards.
Alternatively, an election at £1 means the buyer would be unable to claim any allowances moving forward as the fixed figure would already be almost “entirely depreciated” meaning that the seller would be at liberty to continue to obtain tax relief on the written down value of the assets.
Beyond this, there have been important developments in this area since April 2014. A buyer will now only be in a position to claim the tax relief, moving forward, if the seller has “pooled” its expenditure on the plant and machinery in a chargeable period when it owned the property – this pooling requirement acts alongside the S.198 requirement to fix the figure at which the plant and machinery is being disposed of.
Where a seller has been claiming capital allowances, the pooling requirement will not present a problem as the expenditure will already have been pooled as a pre-cursor to claiming the allowances. Having said that, a buyer will need to pay particular attention if a seller has not been claiming such allowances, meaning that any expenditure has not been pooled. Beyond this, if the situation is somewhere in the middle and the seller has been claiming some, but not all, potential allowances, the buyer will need to ascertain the extent of this.
Crucially, if the seller has not claimed all the allowances possible, the buyer will need to ensure that the expenditure is pooled prior to completion of the transaction. This can be done by providing for such matters in the contract of sale.
One can, therefore, see the great importance attached to the buyer ascertaining the seller’s capital allowances position as early as possible into the transaction, so that the requisite steps can be taken in order to preserve the ability to claim allowances. If this is not done, valuable and highly lucrative allowances can essentially be lost by virtue of being unclaimed by both parties.
Contact us now for further details and expert assistance with your commercial property transaction.