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Capital Allowances on Commercial Properties

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Many investors and business owners with UK commercial property holdings could be sitting on large chunks of unclaimed tax relief – often worth thousands of pounds.

It is estimated that some 90 per cent of the five million business owners and leaseholders are missing out on capital allowances - tax relief available to commercial property owners on items bought for use within the property.

The rules governing which items are eligible to be claimed for are complex and vary significantly from building to building and across different industries. Typically businesses can claim on items that are used in the running of a business, such as heating, security, general power, fire alarms and even carpet. Less obvious items, especially integral features or ‘within the wall’ items are often overlooked. Consequently, many businesses are claiming only the tip of the iceberg, while most of the value remains hidden. Claims can sometimes amount to as much as 35 per cent of the value of a freehold i.e. £350,000 of tax relief for a building bought for £1m.

You cannot claim capital allowances for the cost of things that your business buys and sells as part of its trade. Instead, you will need to include these items in business expenses when you work out your trading profits.

Although always relevant, if you are considering buying or selling a property, the question of capital allowances becomes a vital one. Capital allowances rules state that only one owner is able to take full advantage of the available tax relief during the lifetime of the building, so if the previous owners did not claim the current owner could be in line for a windfall.

However In April 2014 it will become mandatory for capital allowances to be pooled and transferred between owners in the prescribed manner. If the new legislation is not adhered to 100% correctly the purchaser will inherit an enforced capital allowance pool of £0. This will be binding on all future owners as well, probably devaluing their new building overnight. So if you are looking at selling a commercial property after April 2014 you need to look into Capital Allowances as soon as possible.

Property buyers should ideally obtain written confirmation from sellers on their entitlement to claim allowances, and if relevant, details of any claims made. Staying silent is no longer an option and contract clauses along with pre-contract enquiries will need to be updated accordingly.

One can anticipate that there will be some interesting discussions as to the market value of the fixtures in the building. The vendor will probably want a low value to maximise his claim to capital allowances, whereas the purchaser will want a high value for the same reason.

Although this does not come into effect until April 2014 its impact is already being seen. For example, estate agents are now including capital allowance information within their sales material. The lack of such information may cause a prospective purchaser to make a lower offer for the building or could lead to completion being delayed.

Capital allowances are a critical consideration at the point of sale however there are also major savings available even if no transactions are planning. Since 1 January 2013 the annual investment allowance (AIA) has been increased to £250,000 for a period of two years, which has made new qualifying capital expenditure particularly attractive for expenditure after this period.

Any capital allowance claim in respect of a building acquired in this period could attract a 100% deduction against taxable profits in the accounting period in which it is purchased. For a building acquired prior to this date it is likely that any claim will be restricted to the writing down allowance, which currently are either 18% or 8% per annum depending upon the nature of the fixture, thus spreading the relief over several years.

If you need help or advice on capital allowances please let our Commercial Property team know and we shall be pleased to provide you with contact details for specialists in this field.

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