How capital allowances can benefit the owner of commercial property.
Generally, property investors who trade in property rather than carry out a trade from a property cannot claim capital allowances.
Capital allowances and particularly, plant and machinery allowances are an optional tax relief in the form of writing down allowances which can be claimed on fixed plant to reduce the taxable profits of a business. There are also structures and building allowances and allowances for long-life assets but this article will not cover those.
The benefit for owner/occupiers of commercial property is that when expenditure is incurred on fixed plant, an annual percentage can be claimed as a writing down allowance resulting in the expenditure being claimed back over time. The relevant percentages at the time of writing are 18% for the main pool and 6% for the special pool. Which pool a particular item of fixed plant will fall into depends on (1) the nature of the plant and (2) the rules allocating categories of plant from time to time. As capital allowances are optional, the owner must pool its expenditure on fixed plant into either of these pools in order to claim the allowances.
As a few examples, space or water heating systems, air-cooling systems and lifts fall within the special pool with a rate of 6% at the time of writing. If an item does not fall within the special pool, it should be considered for the main pool.
There are several pre-conditions which must be met to claim capital allowances on expenditure. The expenditure must be
- On plant and machinery;
- Wholly or partly for a qualifying activity an example being for trade; and
- The owner/ occupier incurring the expenditure must own the fixed plant as a result of incurring that expenditure.
As an example of how capital allowances could benefit an owner/occupier, say Company A spent £100,000 on a new space heating system for its property in 2020.
In the year following that expenditure, Company A can claim a writing down allowance of 6% of £6,000 for that year.
In the second year after the expenditure, Company A can claim a further 6% of the balance of the expenditure (£94,000) so in this year can claim tax relief of £5,640 and so on until the full expenditure has been reclaimed.
An owner/occupier can also use its annual investment allowance of £1 million in addition to plant and machinery allowances. An owner/occupier could, therefore, claim its annual investment allowance on fixed plant that would fall within the special pool at a rate of 6% before allocating it to the main pool which benefits from a rate of 18% accelerating the tax relief attributable on expenditure on fixed plant which would fall within the special pool.
On the sale of the property, the owner/occupier claiming capital allowances will need to bring in the sale value of the fixed plant which could result in a balancing charge clawing back claimed capital allowances or benefit from a balancing allowance bringing the benefit of the allowances forward. Whether a balancing charge or balancing allowance is incurred, will depend on the value attributed to the fixed plant on the sale of the property. Commonly, a section 198 election will be agreed in the heads of terms or during the contract negotiations to fix the price attributable to the fixed plant. The benefit of a section 198 election is that it is binding on HMRC unlike other methods available to apportion the sale price of fixed plant. When making a section 198 election the optimal position for a seller is an apportionment of £1 to each pool potentially resulting in a balancing allowance, and the optimal position for a buyer would be to apportion the original cost of the fixed plant potentially resulting in a balancing charge on the seller. The value of the apportionment will depend on the bargaining position of the parties involved in the transaction.
This article is intended to serve as a general overview of capital allowances, if you believe you could be claiming capital allowances on fixed plant within your property you should consult your tax advisers or specialist capital allowances adviser. If you are considering a Commercial Property transaction, at Keebles we will raise the issue of capital allowances with you and discuss the contractual options available to you.