New rules affecting the availability of Capital Allowances on purchase transactions were introduced in April. To prevent an avoidable loss of tax relief, the change has triggered a need for prompt and stringent due diligence, which must be completed before exchange of contracts. Is your firm fully up to speed?
ReCap is the specialist Capital Allowances team within Abbey Tax. Our team’s experience includes working on the UK’s most prestigious buildings – the most recent being the Walkie Talkie in London – right through to small refurbishments, medical centres, GP surgeries, pubs, hotels and motor dealerships.
Advice for the property buyer
- Has the seller claimed Capital Allowances? From April 2014 the buyer must satisfy the ‘pooling requirement.’ No claim by the seller means no Capital Allowances for the buyer.
- If the seller has not claimed but could, ensure that the seller undertakes to make a full claim within a stipulated time frame and then passes on the full Capital Allowances via a s198 election. This will necessitate a correctly drafted warranty within the sale and purchase contract.
- Establish the value of any fixtures that have not been claimed. This will necessitate a s198 election where the pooling requirement applies.
- If the seller has made a claim but it is not possible to reach agreement via a s198 election, consider an application to the Tax Chamber of the First-tier Tribunal after completion.
- If the seller has made a claim, negotiate the level of Capital Allowances to be passed to the buyer via a s198 election.
- Understanding tax implications to the seller’s CPSE responses on Capital Allowances, acting on these prior to completion to preserve entitlement.
Advice for the property seller
- If the seller has made a claim, a s198 election will ensure tax certainty. Without the election (or an incorrectly drafted one) the seller is at risk of claw-back of Capital Allowances.
- Recognise the value of co-operating with the buyer so that the pooling requirement can be satisfied. Even though no claim is made before sale, the agreement reached with the buyer could include retaining some allowances when a claim is made at a later date. Alternatively, an increase could be agreed to the sale price. Of course, the seller will be in a far stronger position if the buyer does not agree the Capital Allowances position with the seller before completion.
Advice for the property owner
- If the property was acquired before April 2012 then there is no deadline for action to safeguard the Capital Allowances. However, the level of Capital Allowances is likely to be restricted if any previous owner has made a claim. This necessitates full investigation of ownership history back to 24 July 1996.
- If the property was acquired between April 2012 and April 2014 then it is not necessary for the seller to have made a claim, but if a claim was made then a s198 election must be agreed with the seller within two years of the acquisition date, or an application made to the Tribunal. This is termed the ‘fixed value requirement’.
New development expenditure and refurbishment
- Expenditure on new fixtures as part of a development or refurbishment is unaffected by either the pooling requirement or the fixed value requirement. These requirements only apply to a subsequent owner. However, both types of projects involve specific complications such as apportionment of on-costs, professional fees and categorisation between capital and revenue expenditure and being able to break down lump sum invoices to extract all qualifying items. Where details of actual expenditure is sketchy, use ReCap to generate the cost information reconciled to actual overall spend, which can then be analysed for qualifying expenditure.
ReCap from Abbey Tax offers the following services:
- Capital Allowances analysis on new build, refurbishment and purchases.
- Enhanced Capital Allowances; early tax planning advice and liaising with design professionals.
- Land Remediation Relief.
- Dealing with Renewables and Incentives.
- Research and Development entitlement.
- Consultancy around the ‘new’ pooling requirements on property purchases.
- Negotiation on s198 election amounts for buyers and sellers.
- A no obligation property evaluation identifying the potential for claim.
Author: Richard Whittaker BSc MRICS, Head of Recap.
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