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Commercial buildings: Beware the capital allowance trap

In April 2014 new rules were introduced in relation to making claims for capital allowances on expenditure in buildings in prior years. The provisions prescribe that for a buyer to secure capital allowances they must enter into an election with the seller within two years of completion. With the election the buyer and vendor agree as to the value of the assets to be transferred to the buyer for the purposes of capital allowances.

The election must include:

  • the amount fixed by the election;
  • the name of each of the persons making the election;
  • information sufficient to identify both the plant or machinery and the relevant land;
  • particulars of the interest acquired by the buyer; and
  • the unique taxpayer reference (UTR) of both parties making the election, or a statement that the party in question does not have one.

If the buyer and vendor cannot agree on the amount of the transfer they can within two years of completion apply to the Tax Chamber of the First-tier Tribunal for an independent determination. This is of course an expensive process. It would be preferable to agree a transfer value with the vendor as part of the negotiations prior to completion.

There is a further complexity since 2014, in that the buyer usually can only claim capital allowances to the extent that the vendor ‘pooled’ those fixtures in their capital allowances computations. It is therefore essential that the buyer identifies, at an early stage, the capital allowances claimed by the vendors. This is usually done by the solicitors as part of their initial enquiries. The responses to such enquiries are however frequently inadequate and their significance not widely understood. Where an insufficient claim for capital allowances has been made by the vendor, it is possible for the vendor and buyer to negotiate for the vendor to make additional claims for capital allowances in their computations so the benefit can be passed on to the buyer. This is of course again best done as part of the negotiations prior to completion.

Therefore where you are considering a purchase of a commercial property we would advise you to seek early tax advice in this respect. In addition if you have purchased a commercial property since April 2014, please ensure the appropriate election has been made. If you have not made the election within two years you will not only lose out on your own relief but it will also restrict your ability to pass on the benefit when you sell on the property. The allowances are lost forever.

If you would like to discuss how this legislation affects you, please get in touch with David Hadley or your usual Mercer & Hole contact.



Date: 17th June, 2016
Author: David Hadley


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