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Tax Factor

17 December 2010

Capital allowances on second-hand buildings

Outline

Many purchasers of previously-owned buildings overlook the fact that there is likely to be a reasonable asset value within the building that will qualify for capital allowances. This tax relief can be seen as a discount to the purchase price and surveys of firms specialising in this area show that there can be large savings:

 

Building
% of price
Offices
15-30%
Nursing Homes    
20-30%
Hotels
20-40%
Retail
0-5%

 

These allowances are available to property investors just as much as they are to trading companies owning their own premises. When a property is bought by an individual (or partnership), where income tax rates are now up to 50%, these allowances can prove to be a valuable tax break.

 

The allowances

The principles applying to the operation of these allowances are the same as outlined in the previous article. This means that a detailed analysis of qualifying expenditure needs to be carried out to see what will fall to be treated as integral fixtures and what will be treated as normal plant and machinery.

 

It is worth remembering that the rules for capital allowances on buildings have changed significantly over the last few years and, simply because the previous owner did not claim a particular allowance does not mean that the new owner can’t claim it. For example, general electrical installations, such as wiring and fuse boards, can now be claimed for, whereas prior to 2008 this was not possible.

 

Planning

If the seller (or his advisors) is familiar with the capital allowances regime, it is common for the sale contract to set out how the price is split between (a) the land and building and (b) the assets on which capital allowances have been claimed. Allied to this will be an election under the Capital Allowances Act to ensure that the price attributed to the fixtures – typically £1 – is also made. This enables the seller to continue to get tax relief on assets that have been sold. For the well-advised buyer, this can be an area for negotiation, either on the values set out in the tax election or on the actual sales price.

 

What is important to note is that the election and sales price allocation will only be binding where allowances have actually been claimed, so it is vital to find out during the purchase process exactly what claims have been made. In addition, as already mentioned, since 2008 many fixtures that previously could not qualify for allowances now do, so there is likely to be scope for additional claims, even where the tax election has been made.


Capital gains

One reason sometimes cited for property owners not claiming allowances is that they are concerned that doing so will give them additional capital gains tax liabilities – that is, whatever they claim for by way of capital allowances will be deducted from the original cost when calculating any gain. This is not the case, but even many accountants do not understand the rules. An example may be helpful to show the position:

 

A Ltd bought a property for £3 million and found that there were assets qualifying for capital allowances in it worth £500,000. The property is sold a few years later for £5 million, and by then the tax value of the assets qualifying for capital allowances at the time of sale is £200,000. The sale agreement is silent on the value to be attributed to fixtures.

 

Ignoring indexation allowance, the capital gain is calculated simply by reference to the difference between the sales price (£5m) and the purchase price (£3m) – the capital allowances element is not relevant for capital gains.

Things can, however, become a little more complicated when assets are sold at a loss.

 

Time limits

If you bought a property within the last four years and have not carried out a full review of the potential for capital allowances, it would be worth doing so now as you can still make a claim, even though it is a number of years since the original purchase. If you need help with this, please speak to your usual contact at Wilkins Kennedy.

Contact Us Meet the team
Meet the team
Matthew Hall FCCA CTA

Partner, Director of WK Corporate Finance, Head of Tax

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