How do you know when you buy a property what is available in the way of allowances?

This is something that usually needs to be researched and often even the seller is unaware of the allowances position.  CPSE replies often just state, “No allowances” or “Not applicable”. This due diligence is integral to our work to establish the entitlement of the buyer and importantly whether the level of potential allowances is material.  It is important to establish cooperation of the seller, to enable the capital allowances position to be established later where the transaction needs to progress quickly.  We supply relevant wording to allow this to happen.  It is usually possible to agree contract wording to pass allowances from the seller to the buyer and the quantum can be established post completion.  The party that raises capital allowances first is usually the one to benefit the most.

Is there a time limit for claiming capital allowances?

For expenditure incurred on properties or leasehold interests, it is possible to make a claim in open tax returns provided the property is still in use in the tax return period.

For the purchase of second hand properties it depends on when you purchased the property.  For all properties acquired pre-April 2012, it is possible to make a claim for capital allowances in the tax return up until the final accounting period you still own the property, subject to restrictions for claims already made by former owners.  This means if you acquired the property a number of years ago it is still possible to make a claim for allowances now.  However, recent rules changes mean that for properties acquired post April 2012, where a property is purchased from a UK tax payer it is generally necessary to agree a value for the plant fixtures to be passed from the seller to the buyer within 2 years of the date of acquisition to become entitled to those allowances at the property that the seller was entitled to claim.

Are allowances available when buying from an administrator?

This situation is common and it can be difficult to agree or obtain any information from the administrators who can be dismissive of requests for assistance regarding allowances.  It is therefore important when acting for a buyer in this scenario that any offer letter/Heads of Terms state that the buyer will benefit from all allowances, both claimed and unclaimed, and the administrator will cooperate.

The capital allowances legislation does not work will in this situation and specialist advice is needed.

What capital allowances are available on investment properties?

Capital allowances are available for fixed asset investment properties. They provide a shelter for rental income.

A proportion of the purchase price or refurbishment costs of commercial buildings relates to plant and machinery which will qualify for capital allowances. Examples are electrical, water, heating ventilation and air-conditioning and also fixtures, fittings and equipment. Typically 20%-30% of the purchase price of an office may qualify for capital allowances and between 60%-80% of refurbishments. A capital allowances survey will ensure all qualifying items are identified and valued. Allowances will be lower if there have been previous capital allowances claimed.

A simple example is set out below where £100,000 of allowances are available in a year:

No capital allowances With capital allowances
Rental income  £500,000   £500,000
Interest paid (£400,000)  (£400,000)
Capital allowances              £0  (£100,000)
Taxable income  £100,000              £0

What if the property is held in an overseas company?

If the property is situated in the UK then the rental income is taxable in the UK and capital allowances may be claimed to reduce the taxable profits.

Can a claim be made on an office built 10 years ago. There is no cost information available.

The lack of cost information is not a problem; Lovell Consulting has a team of dual qualified chartered surveyors and tax professionals. Following a site visit, we will be able to assess the cost and establish the level of detail required to prepare a fully substantiated and supported claim. Our format and approach are familiar to HMRC, and over 17 years advising clients, we have never had a claim rejected.

Can capital allowances be claimed on the purchase price of an existing commercial property?

For second hand property purchases, the default method to calculate the quantum of allowances is a just and reasonable apportionment of the purchase price. There will be restrictions where capital allowances have been previously claimed.

Can landlords claim capital allowances for residential property, such as buy to let houses of multiple occupancy (HMOs), student houses or cluster flats and serviced apartments?

General Residential Dwellings

The majority of residential dwellings are non qualifying for capital allowances. The legislation definitively prevents landlords from claiming capital allowances in a dwelling house (as defined above). HM Revenue & Customs definition of a dwelling house include HMOs, cluster flats and student houses. Therefore no allowances will be available anywhere within these properties.

Capital Allowances will however be available to common areas of traditional blocks of self contained flats and student hall type accommodation (please see above answer on common areas of properties).

Serviced Apartments

Provided the trade is treated as a serviced apartments business, capital allowances may be claimed throughout the building (including within individual flats). You will need to ensure genuine services are provided such as cleaning, concierge and food to ensure full allowances are applicable.

May capital allowances be claimed on the communal areas of an apartment block?

Tax legislation and HMRC guidance consider expenditure on plant and machinery within the common parts of a building comprising of two or more “dwelling-house” as qualifying expenditure for capital allowances.

A “dwelling-house” is defined by HMRC as “a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.

There are some restrictions on plant in communal areas to student accommodation buildings. See CA23060.

Can landlords claim capital allowances on expenditure incurred by their tenants?

included in the agreement to lease contract that stipulates how and to whom the contribution will be allocated for capital allowances purposes.

We can advise and provide contract wording to obtain the best tax position for either party.

When do the benefits of the tax saving apply?

the first year.
Expenditure on certain energy-saving plant or machinery may be eligible for Enhanced Capital Allowances (ECAs). Qualifying ECA expenditure can be claimed at 100% WDA in the first year.
Allowances above the AIA threshold are given at a writing down allowance of either 18% or 8% per year depending on the type expenditure. This equates to approximately 50% of allowances given in the first 5 years and 90% of the allowances are given within the first 10 years.

Can property developers claim capital allowances on commercial properties?

It is only possible to claim capital allowances on capital expenditure. This means property developed and held as trading stock will not qualifying for allowances. If these properties are subsequently moved to fixed asset investments on the balance sheet then capital allowances may be claimed at that point.

Can I still benefit from the allowances if I sell the property? / Will I lose all the capital allowances if I sell my commercial property?

Yes. You can retain and continue to claim allowances against any future taxable income of the same trade.

You will need to insert a tax election within the sale and purchase contract to retain allowances going forwards. This election will need to be agreed and signed by both parties (vendor and buyer). If there is no election then any previously claimed allowances can be clawed back.

What is the difference between a property trader or a property investor?

Capital allowances are only available for capital expenditure. So typically are only available to property investors, owner occupiers or occupiers incurring expenditure under a short lease.

A property investor has the intention on purchase to keep a property as a long term investment. Usually they will receive rental income and have capital gains on the property over time. The accounting treatment of the property will be as a capital asset.

A trader has the intention to buy to sell on the short to medium term. Expenditure will be revenue in nature and the accounting treatment of the property will be as trading stock.

Traders can only claim capital allowances if the property is genuinely held as an investment. As shown in the recent Terrace Hill (Berkeley) Ltd v HMRC [2015] case.

As part of an energy strategy, sun pipes have been installed in a GP surgery. Can ECAs be claimed?

Enhanced Capital Allowances (ECAs) are a straightforward way for a business to improve the cashflow through accelerated relief. 100% of the tax relief for ECA assets is given in year 1 as opposed to spreading the relief over many years.

However, in order to qualify, the assets must either be listed on the Energy Technology Product List or the Energy Technology Criteria List. Unfortunately, whilst sun pipes are one of the most energy efficient forms of distributing light into a room, they currently do not feature on either List. HMRC do not view them as part of a lighting installation and therefore no relief is given. Maybe in time their view will change; sun pipes are the most energy saving way of transporting daylight and so it would make sense to encourage such installation.

Can I claim capital allowances on unusual items such as caravans, swimming pools and glasshouses?

The rules for capital allowances are complex and whether an item qualifies or not often depends on case law precedent. If a particular asset is of ongoing use in the trade it may qualify. For example capital allowances are available on swimming pools if they are part of a leisure centre or furnished holiday letting or hotel providing facilities to customers. Similarly there are special rules for caravans depending on whether these are situated on caravans parks. Glasshouses are an example of where the mechanical element to the structure may be claimed related to ventilation but in most cases not the building structure itself if these are used in the trade of garden centres or market gardeners.

A non refundable deposit has been paid for a large air handling unit; the supplier went into receivership and no equipment has been delivered. Can capital allowances be claimed on the deposit?

In general, when claiming plant and machinery allowances, the asset must belong to the taxpayer in order to qualify. Consequently, allowances will normally be unavailable if abortive expenditure is incurred and the asset does not come into existence.

However, in certain situations, the legislation permits abortive deposits to be claimed. The key to whether allowances can be claimed will be in reviewing the contract with the supplier. Assuming you were due to become the owner of the plant and machinery on the performance of the contract, then you may be entitled to claim on the non refundable deposit you paid. S67 CAA2001 covers this.

If a property is transferred from a connected party what price is applicable for capital allowances?

Where an asset is disposed of, or acquired from, a connected party the allowances available are restricted to the lower of connected party’s original purchase price or the market value of the property.

I have bought a property and subsequently let to the vendor to continue his business. Are there any restrictions on claiming allowances?

This is deemed to be a Sale and Leaseback transaction, therefore entitlement to capital allowances may potentially be restricted to the vendor’s original cost, i.e. their capital expenditure incurred on plant and machinery at the property.

What is your fee for reviewing potential opportunities?

There is no fee for providing an initial high level estimate of available allowances. Often further research is required to confirm entitlement to allowances which we progress after we are engaged. We can then provide a specific fee proposal.

There is no fee for providing an initial high level estimate of available allowances. Often further research is required to confirm entitlement to allowances which we progress after we are engaged. We can then provide a specific fee proposal.

Claiming capital allowances for fixed plant and machinery will not reduce the capital gains tax base cost of your qualifying property where a property is sold for a gain. Consequently the CGT calculations is neutral irrespective of whether capital allowances are claimed or not.

Do old tax returns have to be opened to claim capital allowances on historical expenditure?

No, as long as the plant and machinery is still owned by the claiming entity a claim can be made in a current tax return.

Can capital allowances be claimed on asbestos removal?

Land remediation relief can be claimed for asbestos removal as long as the claiming party did not install the asbestos in the first place and is a UK company. There are time restrictions for land remediation relief claims.

A large refurbishment of a hotel has been completed can all the expenditure be claimed as repairs?

If all the expenditure is for like for like replacement then the expenditure can be claimed as repairs. However, normally some expenditure is required for enhancements and a capital allowances analysis is required.

What happens if HMRC query the analysis?

Lovell Consulting will respond to any queries regarding their analysis and have developed a good relationship with HMRC. In 17 years Lovell Consulting have never had a claim rejected by HMRC.