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When a commercial property is sold, part of the selling price will include the value of fixtures that have qualified for capital allowances in the seller’s business.

If the proceeds of sale on those assets exceed the written down value of the ‘pool’ there will be a ‘balancing charge’. A balancing charge is treated as a negative allowance whereby any capital allowances previously claimed will be clawed back.

It is mandatory for a formal ‘s198 election’ to be made between the two parties, enabling agreement of a value for capital allowances purposes only, not exceeding the original purchase price of the assets. If the parties do not agree to this joint election, the purchaser (and any subsequent buyer) is prohibited from claiming any capital allowances on those fixtures.

The seller will want to set a value as low as possible to maximise allowances but the purchaser will want to agree a value that enables him or her to make some amount of claim carrying forward.

Example:
Steve sells an industrial unit to Fred. He originally purchased it in 2007 for £250,000 and the agreed price is £300,000. Steve has claimed capital allowances on air conditioning and security systems costing £50,000. If the written down value of the assets at the point of Steve’s sale to Fred was £20,000 and with the corresponding proceeds value restricted to Steve’s original cost of £50,000, £30,000 allowances that Steve has previously claimed will be ‘clawed’ back.

If the value agreed under the election is £100, Steve will be able to claim a balancing allowance on sale of £19,900 but Fred will only be able to claim £100 going forward.