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Significant changes for Capital Allowances in commercial property fixtures will apply from April 2012: John Lovell and Mark Hoskyns of Lovell Consulting look at the details.

Introduction

On 6 December 2011 draft legislation was published which includes fundamental changes to Capital Allowances. This will impact all commercial property owners.

The changes will come into effect from April 2012.

Two Key Changes

There are two key changes outlined below which will require attention in advance of transactions. If not handled correctly, the purchaser, and all future owners of the property could forfeit entitlement to claim any plant fixtures. As the value of allowances can be in the region of 10%-30% of the purchase price of a property, these new rules introduce a material risk to commercial property owners and their advisors.

1 Mandatory Pooling Requirement

The current rules allow a property owner to claim Capital Allowances at any time whether or not any previous owner has made a claim. The new rules introduce ‘mandatory pooling’ which means a buyer can only claim allowances if the seller has first ‘pooled’ an amount for qualifying expenditure in their tax return. Expenditure after April 2014 may be pooled at any time after acquisition but must be pooled before the end of the tax return period of disposal. It is not unusual for Capital Allowances on plant fixtures not to have been claimed by a seller for various reasons.

The new rules impose a burden on the buyer, if they want to be able to claim allowances, to agree with the seller a value for qualifying expenditure to be pooled by the seller.

If the seller does not pool their qualifying expenditure before the deadline, then the buyer and all future owners lose the ability to claim any Capital Allowances for plant fixtures on which the seller was entitled to claim. This effectively introduces a deadline on Capital Allowances claims for the first time. The time limit for pooling is 24 months from the end of the accounting period of the sale.

2 Fixed Value Requirement (Joint Tax Election)

It is currently possible for a property owner to claim Capital Allowances on an unrestricted apportionment of their purchase price, where no former owners have claimed. The qualifying expenditure is determined with a specialist Capital Allowances valuation. The rules have until now allowed such claims for historic expenditure to be made at any time in any open tax return period.

Alternatively and usually where a seller has claimed allowances, the parties can currently agree a value for qualifying expenditure to be included in a ‘joint tax election’ also known as a ‘section 198 election.’ The value will be negotiated and be anywhere between the sellers cost and £2. The election must be made within 24 months of the sale.

From April 2012, it will become mandatory for a section 198 tax election to be agreed to value the plant on a change in ownership of commercial property. This amount will be used by the seller as their ‘disposal value’ and the buyer as their claim value. The time limit for agreeing the section 198 election will remain as 24 months of the transaction date. If the parties cannot agree a value there is an option to refer the case to a tribunal but again, this must be done within 24 months of the transaction date. If no section 198 election is made the buyer, and all future owners will not be able to claim allowances on any plant fixtures the seller was eligible to claim.

Transitional Rule

During a transitional period for transactions between April 2012 and April 2014 the pooling requirement is waived and it is necessary to meet only the fixed value requirement (tax election).

Historic Expenditure

It is worth noting that those who acquired their properties before April 2012 can continue to claim allowances under the existing rules at any time until sale. This means there is no time limit for claims on ‘historic expenditure.’ This is a change from the original HMRC consultation on the proposed changes.

Integral Features

An interesting point is that the first purchaser post April 2012 acquiring from someone who owned the property pre April 2008 may make an unrestricted claim for the proportion of the purchase price relating to integral features under the expanded definition of plant, such as general lighting and cold water systems. This is because the seller was not entitled to claim on these items and they therefore fall outside the new rules, as Examples 1 and 2 below.

Non-Tax Payers

The new rules do not apply to non tax-payers such as pensions or charities as neither has a qualifying activity nor are they entitled to claim allowances as is required to fall within the new rules.

Therefore, a buyer from a non-tax payer who held the property at April 2012 could still make an unrestricted claim at any time after purchase, but still subject to earlier (pre-2012) tax elections. The pooling requirement and fixed value requirement will not apply in this scenario, see Examples 2 and 3 below.

This means where properties are currently owned by a non tax-payer the new rules (CAA 2001 s 187A) will not apply until a taxpayer acquires the property post April 2012.

Practical Examples

Example 1: Claims for Integral Features Wider Definition of Plant

A tax payer purchased an office building in 2007 and sold it to another tax payer in July 2015. There is a pooling requirement and a fixed value requirement (tax election) for this transaction. The parties agree a fixed value for £0.5m and sign the tax election within the 2 year time limit of July 2017. This means the buyer is able to claim on the £0.5m value in the tax election.

The buyer is well advised and so also makes an unrestricted claim for the £0.3m lighting and cold water systems which the seller was not entitled to claim on. These integral features items fell outside CAA 2001 s 187A rules for both the pooling requirement and fixed value requirement as the seller was never entitled to claim them (requirement of CAA 2001 s 187A(d)) and so the buyer can make an unrestricted claim on the £0.3m in addition to the £0.5m tax election value.

Example 2: Entitlement to Claim and Pooling Requirement

A tax payer ‘A’ purchased an office building in 1993 and sold it to ‘B’ a non-tax payer, a charity, in October 2015. There is both a pooling requirement and fixed value requirement (tax election) for this transaction but no election was signed within the 2 year time-limit of October 2017.

The property is then sold by the charity in 2018 to ‘C’ a tax payer who is not able to make a claim for any allowances except those under the wider definition of integral features plant. This is because no former owner was entitled to claim allowances on these items. When ‘C’ sells the property he will have to agree a fixed value for the integral features items he claimed. When ‘D’ subsequently acquires the property in 2020 he can claim only on the tax election agreed with ‘C.’ In 2023 the buyer ‘D’ finds out that the seller ‘C’ did not claim on all of the office lighting he could have done – but ‘D’ is nevertheless not able to make a claim for this additional lighting as ‘C’ was entitled to make a claim and so failed the pooling requirement for that part of office lighting he did not claim.

Example 3: Sale by a Non Tax-Payer After April 2012

A non-tax paying pension fund purchased an office building in 1993 and sold it to another non-tax payer, a charity, in 2015. There is no pooling requirement or fixed value requirement (tax election). The property is then sold in 2018 to a tax payer who makes a claim for allowances on an unrestricted apportionment of their purchase price. In this example there is no change from present practice.